Independence Bancshares, Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Independence Bancshares, Inc.	Financial_Report.xls
EX-32 - EX-32 - Independence Bancshares, Inc.	d31743_ex32.htm
EX-31.1 - EX-31.1 - Independence Bancshares, Inc.	d31743_ex31-1.htm
EX-31.2 - EX-31.2 - Independence Bancshares, Inc.	d31743_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2014

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _________to_________

Commission File No. 000-51907

Independence Bancshares, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

________________________________________________

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

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

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


Large accelerated filer o	Accelerated filer o	Non-accelerated o	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 o No þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,502,760 shares of common stock, $.01 par value per share, were issued and outstanding as of November 14, 2014.

Independence Bancshares, Inc.

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	September 30, 2014			December 31, 2013
	(unaudited)			(audited)
Assets
Cash and due from banks	$	6,152,282		$	6,541,955
Federal funds sold		4,084,000			7,880,000
Investment securities available for sale		19,771,512			20,125,470
Non-marketable equity securities		607,100			424,200
Loans, net of allowance for loan losses of $1,167,703 and $1,301,886, respectively		65,782,786			62,368,250
Loans held for sale		—			900,000
Accrued interest receivable		299,866			358,350
Property and equipment, net		2,426,002			2,512,816
Other real estate owned and repossessed assets		2,743,557			2,508,170
Other assets		426,136			649,924

Total assets	$	102,293,241		$	104,269,135

Liabilities
Deposits:
Noninterest bearing	$	10,792,531		$	12,044,506
Interest bearing		73,344,378			77,124,171
Total deposits		84,136,909			89,168,677

Borrowings		5,000,000			—
Note payable		600,000			—
Securities sold under agreements to repurchase		37,415			96,879
Accrued interest payable		8,416			7,432
Accounts payable and accrued expenses		1,469,979			688,691

Total liabilities		91,252,719			89,961,679

Commitments and contingencies

Shareholders’ equity
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued		—			—
Common stock, par value $.01 per share; 300,000,000 shares authorized; 20,502,760 shares issued and outstanding		205,028			205,028
Additional paid-in capital		35,067,330			34,738,643
Accumulated other comprehensive loss		(301,468	)		(1,216,718	)
Accumulated deficit		(23,930,368	)		(19,419,497	)

Total shareholders’ equity		11,040,522			14,307,456

Total liabilities and shareholders’ equity	$	102,293,241		$	104,269,135

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

Independence Bancshares, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Interest income
Loans	$	880,640		$	877,959		$	2,548,961		$	2,633,290
Investment securities		126,260			115,586			393,178			352,768
Federal funds sold and other		7,406			15,116			23,784			41,063
Total interest income		1,014,306			1,008,661			2,965,923			3,027,121

Interest expense
Deposits		72,141			102,120			218,231			359,910
Borrowings and note payable		5,922			41			5,996			43,907
Total interest expense		78,063			102,161			224,227			403,817

Net interest income		936,243			906,500			2,741,696			2,623,304
Provision (reversal of provision) for loan losses		—			5,795			(30,000	)		(277,576	)

Net interest income after provision for loan losses		936,243			900,705			2,771,696			2,900,880

Non-interest income
Service fees on deposit accounts		14,167			9,259			36,836			29,322
Residential loan origination fees		51,381			28,191			140,579			97,577
Gain on sale of loans held for sale		—			—			118,452			—
Other income		20,455			6,788			42,540			18,911
Total non-interest income		86,003			44,238			338,407			145,810

Non-interest expenses
Compensation and benefits		668,013			643,300			2,019,236			1,727,172
Real estate owned activity		(6,282	)		152,779			481,686			1,122,477
Occupancy and equipment		159,848			144,412			470,465			424,632
Insurance		57,706			72,645			220,421			311,834
Data processing and related costs		84,901			100,547			253,737			267,212
Professional fees		160,916			172,877			592,258			697,009
Product research and development expense		791,583			543,593			3,296,012			1,807,186
Other		103,527			132,890			287,159			350,331
Total non-interest expenses		2,020,212			1,963,043			7,620,974			6,707,853
Loss before income tax expense		(997,966	)		(1,018,100	)		(4,510,871	)		(3,661,163	)

Income tax expense		—			—			—			—
Net loss	$	(997,966	)	$	(1,018,100	)	$	(4,510,871	)	$	(3,661,163	)

Other comprehensive income (loss), net of tax Unrealized gain (loss) on investment securities available for sale, net of tax		173,952			(233,235	)		915,250			(1,250,837	)
Reclassification adjustment included in net income (loss), net of tax		—			—			—			—
Other comprehensive income (loss)		173,952			(233,235	)		915,250			(1,250,837	)

Total comprehensive loss	$	(824,014	)	$	(1,251,335	)	$	(3,595,621	)	$	(4,912,000	)
Loss per common share – basic and diluted	$	(.05	)	$	(.05	)	$	(.22	)	$	(.18	)
Weighted average common shares outstanding – basic and diluted		20,502,760			20,243,640			20,502,760			19,905,588

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

Independence Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)


							Accumulated other
	Common stock				Additional		comprehensive			Accumulated
	Shares		Amount		paid-in capital		income (loss)			deficit			Total

December 31, 2012		19,733,760	$	197,338	$	33,745,883	$	8,033		$	(13,391,748	)	$	20,559,506
Compensation expense related to stock options granted		—		—		198,996		—			—			198,996
Issuance of stock – capital raise, net of expenses		769,000		7,690		519,812		—			—			527,502
Net loss		—		—		—		—			(3,661,163	)		(3,661,163	)
Unrealized loss on investment securities available for sale, net of tax		—		—		—		(1,250,837	)		—			(1,250,837	)
September 30, 2013		20,502,760	$	205,028	$	34,464,691	$	(1,242,804	)	$	(17,052,911	)	$	16,374,004

December 31, 2013		20,502,760	$	205,028	$	34,738,643	$	(1,216,718	)	$	(19,419,497	)	$	14,307,456
Compensation expense related to stock options granted		—		—		328,687		—			—			328,687
Net loss		—		—		—		—			(4,510,871	)		(4,510,871	)
Unrealized gain on investment securities available for sale, net of tax		—		—		—		915,250			—			915,250
September 30, 2014		20,502,760	$	205,028	$	35,067,330	$	(301,468	)	$	(23,930,368	)	$	11,040,522

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

Independence Bancshares, Inc.

Consolidated Statements of Cash Flows

(unaudited)


	Nine Months Ended September 30,
	2014			2013
Operating activities
Net loss	$	(4,510,871	)	$	(3,661,163	)
Adjustments to reconcile net loss to cash used in operating activities
Reversal of provision for loan losses		(30,000	)		(277,576	)
Depreciation		162,554			95,381
Amortization of investment securities premiums, net		185,983			299,631
Gain on sale of loans held for sale		(118,452	)		—
Compensation expense related to stock options granted		328,687			198,996
Net changes in fair value and losses on other real estate owned and repossessed assets		402,350			1,109,112
Decrease in other assets and accrued interest receivable, net		282,272			146,339
Increase (decrease) in other liabilities and accrued interest payable, net		782,272			(321,925	)
Net cash used in operating activities		(2,515,205	)		(2,411,205	)

Investing activities
Net (increase) decrease in loans		(4,542,084	)		4,567,807
Proceeds from sale of loans held for sale		1,033,000			—
Maturities and sales of investment securities available for sale		—			1,000,000
Repayments of investment securities available for sale		1,083,225			2,309,142
Redemption (purchase) of non-marketable equity securities, net		(182,900	)		278,700
Purchase of property and equipment, net		(75,740	)		(75,707	)
Proceeds from sale of other real estate owned and repossessed assets		505,263			1,353,282
Net cash (used in) provided by investing activities		(2,179,236	)		9,433,224

Financing activities
Decrease in deposits, net		(5,031,768	)		(4,591,889	)
Increase (decrease) in borrowings		5,000,000			(7,000,000	)
Decrease in securities sold under agreement to repurchase		(59,464	)		(75,776	)
Proceeds from issuance of note payable		600,000			—
Paid in capital and common stock from capital raise		—			527,502
Net cash provided by (used in) financing activities		508,768			(11,140,163	)

Net decrease in cash and cash equivalents		(4,185,673	)		(4,118,144	)

Cash and cash equivalents at beginning of the period		14,421,955			22,638,500

Cash and cash equivalents at end of the period	$	10,236,282		$	18,520,356

Supplemental information:
Cash paid for
Interest	$	223,244		$	429,657
Schedule of non-cash transactions
Increase (decrease) in unrealized gain on securities, net of tax	$	915,250		$	(1,250,837	)
Transfers between loans and other real estate owned	$	1,143,000		$	1,351,257

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

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Independence Bancshares, Inc. (the “Company”) is a South Carolina corporation organized to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act of 1996, and to own and control all of the capital stock of Independence National Bank (the “Bank”). The Bank is a national association organized under the laws of the United States and provides banking services to consumers and small- to mid-size businesses, principally in Greenville County, South Carolina. The Bank opened for business on May 16, 2005. On May 31, 2005, the Company sold 2,085,010 shares of its common stock in its initial public offering. All shares were sold at $10.00 per share. The offering raised approximately $20.5 million, net of offering costs.

On December 31, 2012, the Company sold 17,648,750 shares of common stock at a price of $0.80 per share to certain investors in a private placement, including members of our board of directors, for gross proceeds of approximately $14.1 million (the “Private Placement”). On August 1, 2013, the Company sold 769,000 shares of common stock at a price of $0.80 per share to certain existing shareholders in a follow-on public offering for gross proceeds of approximately $615,200 (the “Follow-on Offering”). Upon closing the Private Placement, the Company made a capital contribution of $2.25 million to the Bank in order to increase the Bank’s capital levels above the amounts specified in the Bank’s consent order (the “Consent Order”) with the Office of the Comptroller of the Currency (the “OCC”) dated November 14, 2011, which was terminated on June 4, 2014 as described below. In addition, the Company made a capital contribution to the Bank of $750,000 during the quarter ended March 31, 2013. The Company is using the remaining proceeds of the Private Placement and the proceeds from the Follow-on Offering to build a digital payment technology platform and explore transaction services business opportunities as described in more detail in our Annual Report on Form 10-K for 2013 (the “2013 Form 10-K”) and other periodic reports filed with the Securities and Exchange Commission (the “SEC”) in 2014. In conjunction with our efforts to pursue these opportunities, we have begun offering services under the trade name “nD bancgroup” and have taken steps to protect our intellectual property rights to that name.

We began offering digital banking, payments and transaction services in October 2013 on a limited basis and are focused on expanding and growing this line of business. Notwithstanding our efforts to expand our transaction services, the Bank will continue as a full-service traditional community bank, fulfilling the financial needs of individuals and small business owners in our existing market area. We will continue to provide traditional checking and savings products and commercial, consumer and mortgage loans to the general public, as well as ATM and online banking services, commercial cash management, remote deposit capture, safe deposit boxes, bank official checks, traveler’s checks, and wire transfer capabilities.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the financial statements and footnotes thereto included in our 2013 Form 10-K as filed with the SEC.

Reclassifications

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

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other real estate owned, fair value of financial instruments, evaluating other-than-temporary impairment of investment securities and valuation of deferred tax assets.

Business Segments

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

Subsequent Events

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

Recent Regulatory Developments

On June 5, 2014, the Board of Directors of the Bank received an Order Terminating the Consent Order indicating that the Bank’s Consent Order with the OCC, which, among other things, required the Bank to maintain minimum capital levels in excess of the minimum regulatory capital ratios for “well-capitalized” banks, had been terminated effective June 4, 2014. The Bank was considered “well-capitalized” as of September 30, 2014.

NOTE 2 – LIQUIDITY AND CAPITAL CONSIDERATIONS

The Company

The Company’s cash balances, independent of the Bank, were approximately $782,000 and its real estate held for sale (which serves as collateral for the Company’s note payable) was $1.4 million at September 30, 2014 compared to cash balances of approximately $2.3 million and real estate held for sale of $1.1 million at December 31, 2013. In addition, at December 31, 2013, the Company had a loan held for investment of approximately $811,000 and loans held for sale of approximately $900,000. The loan held for investment was transferred to other real estate and the held for sale loans were sold prior to June 30, 2014. The decrease in liquid assets of approximately $3.5 million is due primarily to expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $1.3 million and a note payable to a related party of $600,000 (secured by the real estate held for sale by the Company) which was advanced in September 2014. See “Note 8 – Business Segments”, for additional information related to the transaction services segment and the related advance.

Under Regulation W, the Bank may not be a source of cash or capital for the Company. Due to the uncertainty of timing and amount of cash that might be received from the conversion of the held for sale assets, the current commitments outstanding, the current run rate on fixed expenses, the current payables, and the prohibition within Regulation W, we believe that the Company does not have sufficient working capital to continue to fund its current level of activities without raising additional funding. Our ability to raise additional capital will depend on a number of factors, including conditions in the capital markets, which are outside of our control. There is a risk we will not be able to raise the capital we need at all or upon favorable terms. If we cannot raise this additional capital, we will not be able to implement our growth objective for our business, and we may be subject to increased regulatory supervision and restriction. These restrictions would most likely have a material adverse effect on our ability to grow and expand which would negatively impact our financial condition and results of operations.

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We plan to meet our future cash needs at the Bank through the liquidation of temporary investments and the generation of deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at September 30, 2014 amounted to $19.8 million, or 19.8% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At September 30, 2014, $2.8 million of our investment portfolio was pledged against outstanding debt. Therefore, the related debt would need to be repaid prior to the securities being sold and converted to cash.

The Bank is a member of the FHLB, from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At September 30, 2014, we had collateral that would support approximately $40.4 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $13.8 million as of September 30, 2014.

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

We believe our liquidity sources are adequate to meet our operating needs at the Bank. However, we continue to carefully focus on liquidity management during 2014. Comprehensive weekly and monthly liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan pay downs and amount and cost of available borrowing sources, including secured overnight federal funds lines with our various correspondent banks.

The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio and was 29.3% at September 30, 2014 compared to 33.1% as of December 31, 2013. The decrease in liquidity is due primarily to the decrease in cash and due from bank and fed funds sold, primarily due to expenses incurred related to the transaction services segment. See “Note 8 – Business Segments”, for additional information related to the transaction services segment.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For further information, refer to the consolidated financial statements and footnotes thereto included in our 2013 Form 10-K as filed with the SEC.

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

At September 30, 2014 and December 31, 2013, the Company had restricted cash totaling $2,000 with the Federal Home Loan Bank (“FHLB”) of Atlanta. Also at December 31, 2013, the Company had restricted cash totaling $500,000 with Pacific Coast Bankers Bank, the Company’s primary correspondent bank. The Company had no restricted cash with Pacific Coast Bankers Bank at September 30, 2014 as the Company changed correspondent banks during the quarter ended March 31, 2014. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Net Loss per Common Share - Basic loss per share represents net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the

Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. For the three and nine month periods ended September 30, 2014 and 2013, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

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

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

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

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

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

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

We did not recognize any income tax benefit or expense for the three and nine month periods ended September 30, 2014 and 2013 due to our net operating loss carryforward position. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During our September 30, 2010 quarterly analysis of the valuation allowance recorded against our deferred tax assets, we determined that it was not more likely than not that our deferred tax assets will be recognized in future years due to the continued decline in credit quality and the resulting impact on net interest margin, increased net losses, and negative impact on capital as a result of provision for loan losses and write-downs on other real estate owned, and we recorded a 100% valuation allowance against the deferred tax asset. We will continue to analyze our deferred tax assets and related valuation allowance each quarter taking into account performance compared to forecast and current economic or internal information that would impact forecasted earnings.

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

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

In January 2014, the FASB amended the Receivables — Troubled Debt Restructurings by Creditors subtopic of the ASC to address the reclassification of consumer mortgage loans collateralized by residential real estate upon foreclosure.

The amendments clarify the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2014, the FASB amended Receivables topic of the ASC. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2014, the FASB issued guidance to change the criteria for reporting a discontinued operation. Under the new guidance, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016.. The Company is in the process of evaluating the impact these amendments will have on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the amendments are effective. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company does not expect these amendments to have a material effect on its financial statements.

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

NOTE 4 – INVESTMENT SECURITIES

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

	September 30, 2014
		Amortized		Gross Unrealized					Fair
		Cost		Gains		Losses			Value

Government-sponsored mortgage-backed	$	9,768,581	$	105,678	$	(322,029	)	$	9,552,230
Collateralized mortgage-backed		2,041,877		—		(100,681	)		1,941,196
Municipals, tax-exempt		6,942,807		49,444		(40,985	)		6,951,266
Municipals, taxable		1,319,715		8,797		(1,692	)		1,326,820

Total investment securities	$	20,072,980	$	163,919	$	(465,387	)	$	19,771,512


	December 31, 2013
		Amortized		Gross Unrealized					Fair
		Cost		Gains		Losses			Value

Government-sponsored mortgage-backed	$	10,952,187	$	43,394	$	(542,309	)	$	10,453,272
Collateralized mortgage-backed		2,045,781		—		(170,427	)		1,875,354
Municipals, tax-exempt		7,018,616		—		(512,489	)		6,506,127
Municipals, taxable		1,325,604		4,417		(39,304	)		1,290,717

Total investment securities	$	21,342,188	$	47,811	$	(1,264,529	)	$	20,125,470

The following table presents information regarding securities with unrealized losses at September 30, 2014:


	Securities in an Unrealized Loss Position for Less than 12 Months				Securities in an Unrealized Loss Position for More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government-sponsored mortgage-backed	$	—	$	—	$	5,307,204	$	322,029	$	5,307,204	$	322,029
Collateralized mortgage-backed		—		—		2,051,250		100,681		2,051,250		100,681
Municipals, tax-exempt		—		—		2,311,170		40,985		2,311,170		40,985
Municipals, taxable		502,465		1,692		—		—		502,465		1,692
Total temporarily impaired securities	$	502,465	$	1,692	$	9,669,624	$	463,695	$	10,172,089	$	465,387

The following table presents information regarding securities with unrealized losses at December 31, 2013:


	Securities in an Unrealized Loss Position for Less than 12 Months				Securities in an Unrealized Loss Position for More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government-sponsored mortgage-backed	$	2,753,651	$	55,958	$	6,955,336	$	486,351	$	9,708,987	$	542,309
Collateralized mortgage-backed		—		—		1,875,354		170,427		1,875,354		170,427
Municipals, tax-exempt		5,497,537		402,945		1,008,590		109,544		6,506,127		512,489
Municipals, taxable		998,435		39,304		—		—		998,435		39,304
Total temporarily impaired securities	$	9,249,623	$	498,207	$	9,839,280	$	766,322	$	19,088,903	$	1,264,529

At September 30, 2014, investment securities with a fair value of $502,465 and unrealized losses of $1,692 had been in a continuous loss position for less than twelve months. At September 30, 2014, investment securities with a fair value of approximately $9.7 million and unrealized losses of $463,695 had been in a continuous loss position for more than twelve months. All remaining investment securities, which were rated at AA+ or AAA grade, were in an unrealized gain position. The Company believes that, based on industry analyst reports and credit ratings, the deterioration in the fair value of these investment securities available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company has the ability and intent to hold these securities until such time as the values recover or the securities mature. At December 31, 2013, investment securities with a fair value of $9.2 million and unrealized losses of $498,207 had been in a continuous loss position for less than twelve months. At December 31, 2013, investment securities with a fair value of approximately $9.8 million and unrealized losses of $766,322 had been in a continuous loss position for more than twelve months. All remaining investment securities were in an unrealized gain position.

The amortized costs and fair values of investment securities available for sale at September 30, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.


	September 30, 2014
	Amortized Cost		Fair Value
Due within one year	$	—	$	—
Due after one through three years		—		—
Due after three through five years		—		—
Due after five through ten years		2,831,354		2,734,291
Due after ten years		17,241,626		17,037,221
Total investment securities	$	20,072,980	$	19,771,512

NOTE 5 – LOANS

At September 30, 2014, our gross loan portfolio consisted primarily of $33.0 million of commercial real estate loans, $14.5 million of commercial business loans, and $19.6 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2013 10-K.

Previously, in June 2013, the Company purchased several pieces of real estate owned totaling $3.3 million and three loans totaling $2.2 million, from the Bank (under terms that meet the Market Terms Requirement as described in Regulation W covering transactions between affiliates) in order to support a reduction in the Bank’s adversely classified assets ratio. Through June 30, 2014, the Company sold eight pieces of the real estate owned purchased from the Bank for proceeds of approximately $2.1 million, which resulted in an aggregate loss of $1,509,442 to the Company. During the quarter ended September 30, 2014, the Company sold two additional pieces of real estate owned purchased from the Bank for proceeds of

$39,707, which resulted in a gain of $12,617 (and an aggregate loss to the Company through September 30, 2014 of $1,496,825). The remaining pieces of real estate owned purchased from the Bank are being actively marketed for sale. Any proceeds received from the sale of real estate used as collateral on the note payable will be applied towards the remaining balance due on the note.

At December 31, 2013, the Company held $900,000 classified as loans held for sale that are not included in the loan balances disclosed above or in the disclosures presented in the remainder of Note 5. At December 31, 2013, the Company was in the process of soliciting bids to sell approximately $1.3 million of loans to unaffiliated third party investors, and it was the Company’s intent to accept the highest bid received assuming it was greater than $900,000. As of December 31, 2013, these loans were reclassified out of the loans held for investment category and segregated on the balance sheet as held for sale. These loans are carried at their liquidation value based on the minimum acceptable bid threshold set by the Company with the remaining difference of approximately $407,000 being charged off through the allowance for loan losses as of December 31, 2013. During the nine months ended September 30, 2014, the two loans classified as held for sale were sold for total proceeds of $1,033,000. A success fee of approximately $41,000 and a net gain of approximately $118,000 was recognized as a result of this sale.

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

Loan Performance and Asset Quality

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

The following table summarizes delinquencies and nonaccruals, by portfolio class, as of September 30, 2014 and December 31, 2013.


	Single and multifamily residential real estate		Construction and development		Commercial real estate - other		Commercial business		Consumer		Total
September 30, 2014
30-59 days past due	$	141,519	$	—	$	502,162	$	14,603	$	—	$	658,284
60-89 days past due		—		—		—		226,688		—		226,688
Nonaccrual		—		—		532,200		47,800		—		580,000
Total past due and nonaccrual		141,519		—		1,034,362		289,091		—		1,464,972
Current		18,059,987		8,237,563		23,706,985		14,259,063		1,354,233		65,617,831
Total loans (gross of deferred fees)	$	18,201,506	$	8,237,563	$	24,741,347	$	14,548,154	$	1,354,233	$	67,082,803
Deferred fees Loan loss reserve												(132,314) (1,167,703)
Total Loans, net											$	65,782,786


	Single and multifamily residential real estate		Construction and development		Commercial real estate - other		Commercial business		Consumer		Total
December 31, 2013
30-59 days past due	$	—	$	42,542	$	524,430	$	—	$	—	$	566,972
60-89 days past due		—		—		—		—		—		—
Nonaccrual		46,847		1,008,253		347,615		—		—		1,402,715
Total past due and nonaccrual		46,847		1,050,795		872,045		—		—		1,969,687
Current		18,710,637		9,002,305		20,923,002		12,170,698		999,941		61,806,583
Total loans (gross of deferred fees)	$	18,757,484	$	10,053,100	$	21,795,047	$	12,170,698	$	999,941	$	63,776,270
Deferred fees												(106,134	)
Loan loss reserve												(1,301,886	)
Total Loans, net											$	62,368,250

At September 30, 2014 and December 31, 2013, there were nonaccrual loans of $580,000 and $1.4 million, respectively. Foregone interest income related to nonaccrual loans equaled $27,435 and $129,062 for the nine months ended September 30, 2014 and 2013, respectively. At September 30, 2014 and December 31, 2013, there were no accruing loans which were contractually past due 90 days or more as to principal or interest payments.

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

The following table summarizes management’s internal credit risk grades, by portfolio class, as of September 30, 2014 and December 31, 2013.


September 30, 2014	Single and multifamily residential real estate		Construction and development		Commercial real estate – other		Commercial business		Consumer		Total
Pass Loans	$	11,388,915	$	1,372,709	$	—	$	—	$	1,317,109	$	14,078,733
Grade 1 - Prime		—		—		—		—		—		—
Grade 2 - Good		—		—		—		158,314		—		158,314
Grade 3 - Acceptable		1,886,255		928,071		9,776,542		3,512,688		37,124		16,140,680
Grade 4 – Acceptable w/ Care		3,697,285		5,335,985		13,009,333		9,607,714		—		31,650,317
Grade 5 – Special Mention		—		84,482		656,294		994,949		—		1,735,725
Grade 6 - Substandard		1,229,051		516,316		1,299,178		274,489		—		3,319,034
Grade 7 - Doubtful		—		—		—		—		—		—
Total loans (gross of deferred fees)	$	18,201,506	$	8,237,563	$	24,741,347	$	14,548,154	$	1,354,233	$	67,082,803


December 31, 2013	Single and multifamily residential real estate		Construction and development		Commercial real estate – other		Commercial business		Consumer		Total
Pass Loans	$	10,875,181	$	693,307	$	—	$	—	$	999,941	$	12,568,429
Grade 1 - Prime		—		—		—		—		—		—
Grade 2 - Good		—		—		274,757		176,921		—		451,678
Grade 3 - Acceptable		1,967,068		646,410		6,743,008		3,034,590		—		12,391,076
Grade 4 – Acceptable w/ Care		4,571,825		6,743,830		13,232,782		8,959,187		—		33,507,624
Grade 5 – Special Mention		731,681		88,665		677,746		—		—		1,498,092
Grade 6 - Substandard		611,729		1,880,888		866,754		—		—		3,359,371
Grade 7 - Doubtful		—		—		—		—		—		—
Total loans (gross of deferred fees)	$	18,757,484	$	10,053,100	$	21,795,047	$	12,170,698	$	999,941	$	63,776,270

Loans graded one through four are considered “pass” credits. At September 30, 2014, approximately 92% of the loan portfolio had a credit grade of “pass” compared to 92% at December 31, 2013. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. As of September 30, 2014, we had loans totaling $1.7 million classified as special mention compared to $1.5 million as of December 31, 2013. This classification is utilized when an initial concern is identified about the financial health of a borrower. Loans are designated as such in order to be monitored more closely than other credits in the loan portfolio. At September 30, 2014, substandard loans totaled $3.3 million, with all loans being collateralized by real estate compared to $3.4 million at December 31, 2013. Substandard credits are evaluated for impairment on a quarterly basis.

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

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

At September 30, 2014, impaired loans totaled $2.5 million, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Impaired loans increased $1.0 million from December 31, 2013 due to several loans totaling $2.3 million being deemed impaired during the nine months ended September 30, 2014, partially offset by $1.1 million in loans being transferred to other real estate owned and $0.2 million in loan balance reductions occurred through pay downs or short sales during the nine months ended September 30, 2014. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. As of September 30, 2014, we had loans totaling $774,799 that were classified in accordance with our loan rating policies but were not considered impaired. The following table summarizes information relative to impaired loans, by portfolio class, at September 30, 2014 and December 31, 2013.


	Unpaid principal balance		Recorded investment		Related allowance		Average impaired investment		Year to date interest income
September 30, 2014
With no related allowance recorded:
Single and multifamily residential real estate	$	879,688	$	879,688	$	—	$	678,039	$	33,115
Construction and development		—		—		—		145,888		—
Commercial real estate - other		187,934		187,934		—		140,950		—
With related allowance recorded:
Single and multifamily residential real estate		90,880		90,880		7,000		584,180		4,461
Construction and development		—		—		—		616,951		—
Commercial real estate - other		1,111,244		1,111,244		51,944		647,825		33,081
Commercial business		274,489		274,489		199,245		68,622		10,121
Consumer		—		—		—		—		—
Total:
Single and multifamily residential real estate		970,568		970,568		7,000		1,262,219		37,576
Construction and development		—		—		—		762,839		—
Commercial real estate - other		1,299,178		1,299,178		51,944		788,775		33,081
Commercial business		274,489		274,489		199,245		68,622		10,121
Consumer		—		—		—		—		—
	$	2,544,235	$	2,544,235	$	258,189	$	2,882,455	$	80,778

December 31, 2013
With no related allowance recorded:
Single and multifamily residential real estate	$	46,846	$	46,846	$	—	$	68,150	$	—
Construction and development		99,064		99,064		—		1,024,431		—
Commercial real estate - other		—		—		—		397,866		—
Commercial business		—		—		—		—		—
Consumer		—		—		—		—		—
With related allowance recorded:
Single and multifamily residential real estate		91,845		91,845		7,425		1,061,643		4,546
Construction and development		1,174,019		909,189		101,000		1,309,119		—
Commercial real estate - other		347,969		347,969		83,614		339,453		—
Commercial business		—		—		—		—		—
Consumer		—		—		—		—		—
Total:
Single and multifamily residential real estate		138,691		138,691		7,425		1,129,793		4,546
Construction and development		1,273,083		1,008,253		101,000		2,333,550		—
Commercial real estate - other		347,969		347,969		83,614		737,319		—
Commercial business		—		—		—		—		—
Consumer		—		—		—		—		—
	$	1,759,743	$	1,494,913	$	192,039	$	4,200,662	$	4,546

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

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

At September 30, 2014 and December 31, 2013, the principal balance of TDRs was approximately $344,000 and $0, respectively. As of September 30, 2014, the carrying balance of TDRs consisted of one performing loan for approximately $344,000, which was restructured and granted a period of interest only payments during January 2014. At December 31, 2013, the principal balance of TDRs was $0 as these loans had been reclassified as loans held for sale at that date. During the nine months ended September 30, 2014, the two loans classified as held for sale and previously classified as TDRs were sold for total proceeds of $1,033,000. A success fee of approximately $41,000 and a gain of approximately $118,000 was recognized as a result of this sale.

There were no loans modified as troubled debt restructurings within the previous 12-month period for which there was a payment default during the nine months ended September 30, 2014.

Provision and Allowance for Loan Losses

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

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

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

The following table summarizes activity related to our allowance for loan losses for the nine months ended September 30, 2014 and 2013, by portfolio segment.


	Single and multifamily residential real estate			Construction and development			Commercial real estate - other			Commercial business			Consumer			Total
September 30, 2014
Allowance for loan losses:
Balance, beginning of period	$	268,757		$	710,010		$	206,176		$	26,870		$	90,073		$	1,301,886
Reversal of provision for loan losses		—			(30,000	)		—			—			—			(30,000	)
Loan charge-offs		—			(114,989	)		(104,588	)		—			—			(219,577	)
Loan recoveries		3,427			—			—			38,400			73,567			115,394
Net loans charged-off		3,427			(114,589	)		(104,588	)		38,400			73,567			(104,183	)
Balance, end of period	$	272,184		$	565,021		$	101,588		$	65,270		$	163,640		$	1,167,703

Individually reviewed for impairment	$	7,000		$	—		$	51,944		$	199,245		$	—		$	258,189
Collectively reviewed for impairment		265,184			565,021			49,644			(133,975	)		163,640			909,514
Total allowance for loan losses	$	272,184		$	565,021		$	101,588		$	65,270		$	163,640		$	1,167,703

Gross loans, end of period:
Individually reviewed for impairment	$	970,568		$	—		$	1,299,178		$	274,489		$	—		$	2,544,235
Collectively reviewed for impairment		17,230,938			8,237,563			23,442,169			14,273,665			1,354,233			64,538,568
Total loans (gross of deferred fees)	$	18,201,506		$	8,237,563		$	24,741,347		$	14,548,154		$	1,354,233		$	67,082,803

September 30, 2013
Allowance for loan losses:
Balance, beginning of year	$	611,576		$	1,073,110		$	63,747		$	36,682		$	73,301		$	1,858,416
Reversal of provision for loan losses		(83,473	)		(462,040	)		267,429			(16,312	)		16,820			(277,576	)
Loan charge-offs		(177,595	)		(97,060	)		—			—			(148	)		(274,803	)
Loan recoveries		—			95,000			—			6,500			100			101,600
Net loans charged-off		(177,595	)		(2,060	)		—			6,500			(48	)		(173,203	)
Balance, end of period	$	350,508		$	609,010		$	331,176		$	26,870		$	90,073		$	1,407,637

Individually reviewed for impairment	$	90,004		$	—		$	75,972			—		$	—		$	165,976
Collectively reviewed for impairment		260,504			609,010			255,204			26,870			90,073			1,241,661
Total allowance for loan losses	$	350,508		$	609,010		$	331,176		$	26,870		$	90,073		$	1,407,637

Gross loans, end of period:
Individually reviewed for impairment	$	220,152		$	1,008,253		$	339,972		$	—		$	—		$	1,568,377
Collectively reviewed for impairment		18,824,803			9,237,637			22,601,794			10,913,575			1,246,465			62,824,274
Total loans (gross of deferred fees)	$	19,044,955		$	10,245,890		$	22,941,766		$	10,913,575		$	1,246,465		$	64,392,651


		September 30, 2014			September 30, 2013
Nonaccrual loans	$	580,000		$	1,475,702
Average gross loans		66,137,954			66,250,162
Net loans charged-off as a percentage of average gross loans		.16	%		26	%
Allowance for loan losses as a percentage of total gross loans		1.74	%		2.19	%
Allowance for loan losses as a percentage of non-accrual loans		201.33	%		95.39	%

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. Beginning in the first quarter 2012, we began using the average of the last eight quarters of our charge-off history versus the prior three years with a heavier weight on the most recent year, both adjusted for portfolio and economic factors. The general reserve as a percentage of loans has decreased from 1.93% at December 31, 2013 to 1.36% at September 30, 2014. While management

utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

Maturities and Sensitivity of Loans to Changes in Interest Rates

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


	One year or less		After one but within five years		After five years		Total
September 30, 2014
Single and multifamily residential real estate	$	5,567,593	$	8,201,649	$	4,432,264	$	18,201,506
Construction and development		2,924,347		4,839,606		473,610		8,237,563
Commercial real estate - other		3,463,908		20,604,794		672,645		24,741,347
Commercial business		5,151,654		7,608,066		1,788,434		14,548,154
Consumer		290,886		1,043,237		20,110		1,354,233
Total	$	17,398,388	$	42,297,352	$	7,387,063	$	67,082,803


	One year or less		After one but within five years		After five years		Total
December 31, 2013
Single and multifamily residential real estate	$	2,528,783	$	11,767,239	$	4,461,462	$	18,757,484
Construction and development		3,930,335		6,122,765		—		10,053,100
Commercial real estate - other		1,987,071		19,040,747		767,229		21,795,047
Commercial business		2,423,356		8,940,000		807,342		12,170,698
Consumer		289,382		691,946		18,613		999,941
Total	$	11,158,927	$	46,562,697	$	6,054,646	$	63,776,270


Loans maturing after one year with:		September 30, 2014		September 30, 2013
Fixed interest rates	$	20,404,883	$	24,691,121
Floating interest rates	$	29,279,532	$	27,926,222

NOTE 6 – FAIR VALUE

Assets and Liabilities Measured at Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are detailed in Note 3.

Available-for-sale investment securities ($19,771,512 and $20,125,470 at September 30, 2014 and December 31, 2013, respectively) are carried at fair value and measured on a recurring basis using Level 2 inputs. Fair values are estimated by using bid prices and quoted prices of pools or tranches of securities with similar characteristics.

We do not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific reserve within the allowance for loan losses is established or the loan is charged down to the fair value less costs to sell. At September 30, 2014, all impaired loans were evaluated on a nonrecurring basis based on the market value of the underlying collateral. Market values are generally obtained using independent appraisals or other market data, which the Company considers to be Level 3 inputs. The aggregate carrying amount, net of specific reserves, of impaired loans carried at fair value at September 30, 2014 and December 31, 2013 was $2.3 million and $1.3 million, respectively.

At December 31, 2013, the Company held $900,000 in loans classified as held for sale, which are included in the table below, because the Company was in the process of soliciting bids to sell approximately $1.3 million of loans to unaffiliated third party investors, and it was the Company’s intent to accept the highest bid received assuming it was greater than $900,000. As of December 31, 2013, these loans were reclassified out of the loans held for investment category and segregated on the balance sheet as held for sale. These loans were carried at their liquidation value based on the minimum acceptable bid threshold set by the Company with the remaining difference of approximately $407,000 being charged off through the allowance for loan losses. During the nine months ended September 30, 2014, the two loans classified as held for sale were sold for total proceeds of $1,033,000. A success fee of approximately $41,000 and a gain of approximately $118,000 were recognized as a result of this sale.

Other real estate owned and repossessed assets, generally consisting of properties or other collateral obtained through foreclosure or in satisfaction of loans, are carried at the lower of cost or market value and measured on a non-recurring basis. Market values are generally obtained using independent appraisals which are generally prepared using the income or market valuation approach, adjusted for estimated selling costs which the Company considers to be Level 3 inputs. The carrying amount of other real estate owned and repossessed assets carried at fair value at September 30, 2014 and December 31, 2013 was $2,743,557 and $2,508,170, respectively. The Company utilizes two methods to determine carrying values, either appraised value, or if lower, current net listing price.

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

For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2014, the significant observable inputs used in the fair value measurements were as follows:


Description	Fair Value at September 30, 2014	Valuation Technique	Significant Unobservable Inputs
Other real estate owned and repossessed assets	$2,743,557	Appraised value	Discounts to reflect current market conditions, abbreviated holding period, and estimated costs to sell
Impaired loans	$2,286,046	Internal assessment of appraised value	Adjustments to estimated value based on recent sales of comparable collateral

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows:


Description	Fair Value at December 31, 2013	Valuation Technique	Significant Unobservable Inputs
Other real estate owned and repossessed assets	$2,508,170	Appraised value	Discounts to reflect current market conditions and estimated costs to sell
Impaired loans	$1,302,874	Internal assessment of appraised value	Adjustments to estimated value based on recent sales of comparable collateral

Disclosures about Fair Value of Financial Instruments

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

Loans held for sale ($900,000 at December 31, 2013) are carried at fair value and measured on a non-recurring basis using Level 2 inputs. The carrying value of loans held for sale as of December 31, 2013 approximates fair value as these loans were discounted to their liquidation value which is equal to the minimum acceptable bid price established by the Company in connection with the Company’s intent to sell these loans to unaffiliated third party investors.

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

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

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

The estimated fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013 are as follows:


September 30, 2014	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,152,282	$	6,152,282	$	6,152,282		—		—
Federal funds sold		4,084,000		4,084,000		4,084,000		—		—
Investment securities available for sale		19,771,512		19,771,512		—		19,771,512		—
Non-marketable equity securities		607,100		607,100		—		607,100		—
Loans, net		65,782,786		65,715,836		—		—		65,715,836

Financial Liabilities:
FHLB advance		5,000,000		5,000,790		—		5,000,790		—
Note payable		600,000		603,572		—		603,572		—
Deposits		84,136,909		83,162,918		—		83,162,918		—
Securities sold under agreements to repurchase		37,415		37,415		—		37,415		—


December 31, 2013	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	6,541,955	$	6,541,955	$	6,541,955	$	—	$	—
Federal funds sold		7,880,000		7,880,000		7,880,000		—		—
Investment securities available for sale		20,125,470		20,125,470		—		20,125,470		—
Non-marketable equity securities		424,200		424,200		—		424,200		—
Loans, net		62,368,250		62,304,580		—		—		62,304,580
Loans held for sale		900,000		900,000		—		900,000		—

Financial Liabilities:
Deposits		89,168,677		88,778,134		—		88,778,134		—
Securities sold under agreements to repurchase		96,879		96,879		—		96,879		—

NOTE 7 – STOCK COMPENSATION PLANS

The Independence Bancshares, Inc. 2005 Stock Incentive Plan (the “2005 Incentive Plan”) initially reserved up to 260,626 shares of the Company’s common stock for the issuance of stock options but contained an evergreen provision, which provided that the maximum number of shares to be issued under the 2005 Incentive Plan would automatically increase each time the Company issued additional shares of common stock such that the total number of shares issuable under the 2005 Incentive Plan would at all times equal 12.5% of the then outstanding shares of common stock. With the closing of the Private Placement on December 31, 2012, the number of shares reserved for the issuance of stock options under the 2005 Incentive Plan increased to 2,466,720 shares.

In February 2013, our board of directors amended the 2005 Incentive Plan to cap the number of shares issuable thereunder at 2,466,720 and adopted the Independence Bancshares, Inc. 2013 Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan is an omnibus equity incentive plan which provides for the granting of various types of equity compensation awards, including stock options, restricted stock, and stock appreciation rights, to the Company’s employees and directors. Initially, the maximum number of shares of common stock that may be issued under the 2013 Incentive Plan was 2,466,720. Such number will automatically adjust each time the Company issues additional shares of common stock so that the number of shares of common stock available for issuance under the 2013 Incentive Plan (plus the 2,466,720 shares reserved for issuance under the 2005 Incentive Plan) continues to equal 20% of the Company’s total outstanding shares, assuming all shares under the 2005 Incentive Plan and the 2013 Incentive Plan are exercised. Our board of directors submitted the 2013 Incentive Plan to the shareholders of the Company for their consideration at the 2013 annual shareholders’ meeting and it was approved.

On August 1, 2013, the Company sold 769,000 shares of common stock at a price of $0.80 per share to certain existing shareholders in a Follow-On Offering for gross proceeds of approximately $615,200. As a result of the evergreen provision of the 2013 Incentive Plan, the total shares available for grant under the 2013 Incentive Plan increased by 192,250 shares to 2,658,970 as of the close of the Follow-On Offering.

During the year ended December 31, 2013, the Company granted an additional 2,800,000 stock options to certain employees and an advisor to the Company under the 2005 Incentive Plan and the 2013 Incentive Plan, for a total outstanding of 3,273,505 options at a weighted average price of $1.08. Of the 3,273,505 options issued, as of December 31, 2013, 734,255 options were vested.

In February 2014, the Company granted an additional 155,000 stock options at a price of $1.59 to certain employees and to a third-party contractor, for a total outstanding of 3,428,505 options at a weighted average price of $1.11. In April 2014, 240,000 options granted to one employee were cancelled. Of the 3,188,505 options issued, 1,907,880 options were vested as of September 30, 2014.

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. The Company determines the assumptions used in the Black-Scholes option pricing model as follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the option); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if future volatility is reasonably expected to differ from the past); and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

Compensation expense related to stock options granted was $328,687 and $198,996 for the nine months ended September 30, 2014 and September 30, 2013, respectively. Compensation expense is based on the fair value of the option estimated at the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight line basis over the vesting period of the option.

NOTE 8 – BUSINESS SEGMENTS

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

The following table presents selected financial information for the Company’s reportable business segments for the three and nine months ended September 30, 2014 and 2013.


			Holding Company
	Banking		Transaction Services			Asset Management			Parent Only			Eliminations			Total
For the three months ended September 30, 2014
Interest income	$	1,014,306	$	—		$	—		$	—		$	—		$	1,014,306
Interest expense		74,842		—			—			3,221			—			78,063
Net interest income (expense)		939,464		—			—			(3,221	)		—			936,243
Reversal of provision for loan losses		—		—			—			—			—			—
Noninterest income		109,478		—			—			90,137			(113,612	)		86,003
Noninterest expense		958,663		791,583			21,382			271,917			(23,333	)		2,020,212
Income (loss) before income taxes		90,279		(791,583	)		(21,382	)		(185,001	)		(90,279	)		(997,966	)
Income taxes		—		—			—			—			—			—
Net income (loss)	$	90,279	$	(791,583	)	$	(21,382	)	$	(185,001	)	$	(90,279	)	$	(997,966	)


				Holding Company
	Banking			Transaction Services			Asset Management			Parent Only			Eliminations			Total
For the nine months ended September 30, 2014
Interest income	$	2,988,587		$	—		$	(22,664	)	$	—		$	—		$	2,965,923
Interest expense		221,006						—			3,221			—			224,227
Net interest income (expense)		2,767,581			—			(22,664	)		(3,221	)		—			2,741,696
Reversal of provision for loan losses		(30,000	)		—			—			—			—			(30,000	)
Noninterest income		313,123			—			118,452			199,607			(292,775	)		338,407
Noninterest expense		2,911,262			3,296,012			600,813			906,220			(93,333	)		7,620,974
Income (loss) before income taxes		199,442			(3,296,012	)		(505,025	)		(709,834	)		(199,442	)		(4,510,871	)
Income taxes		—			—			—			—			—			—
Net income (loss)	$	199,442		$	(3,296,012	)	$	(505,025	)	$	(709,834	)	$	(199,442	)	$	(4,510,871	)


	Banking		Holding Company (1)		Eliminations			Total
As of September 30, 2014
Cash and due from banks	$	5,745,103	$	782,073	$	(374,894	)	$6,152,282
Federal funds sold		4,084,000		—		—		4,084,000
Investment securities		19,771,512		—		—		19,771,512
Loans receivable, net		65,782,786		—		—		65,782,786
Other real estate owned		1,360,357		1,383,200		—		2,743,557
Property and equipment, net		2,127,746		298,256		—		2,426,002
Other assets		1,053,323		279,779		—		1,333,102
Total assets	$	99,924,827	$	2,743,308	$	(374,894	)	$102,293,241

Deposits	$	84,511,803	$	—	$	(374,894	)	$84,136,909
Securities sold under agreements to repurchase		37,415		—		—		37,415
Borrowings		5,000,000		—		—		5,000,000
Note Payable		—		600,000		—		600,000
Accrued and other liabilities		156,574		1,321,821		—		1,478,395
Shareholders’ equity		10,219,035		821,487		—		11,040,522
Total liabilities and shareholders’ equity	$	99,924,827	$	2,743,308	$	(374,894	)	$102,293,241

(1)

Excludes investment in wholly-owned Bank subsidiary


			Holding Company
	Banking		Transaction Services			Asset Management			Parent Only			Eliminations			Total
For the three months ended September 30, 2013
Interest income	$	991,182	$	—		$	18,432		$	(953	)	$	—		$	1,008,661
Interest expense		102,161		—			—			—			—			102,161
Net interest income (expense)		889,021		—			18,432			(953	)		—			906,500
(Reversal) provision for loan losses		—		—			122,424			(116,629	)		—			5,795
Noninterest income		79,240		—			—			124,825			(159,827	)		44,238
Noninterest expense		834,436		543,593			336,770			274,246			(35,002	)		1,963,043
Income (loss) before income taxes		124,825		(543,593	)		(440,762	)		(33,745	)		(124,825	)		(1,018,100	)
Income taxes		—		—			—			—			—			—
Net income (loss)	$	124,825	$	(543,593	)	$	(440,762	)	$	(33,745	)	$	(124,825	)	$	(1,018,100	)


				Holding Company
	Banking			Transaction Services			Asset Management			Parent Only			Eliminations		Total
For the nine months ended September 30, 2013
Interest income	$	3,008,689		$	—		$	18,432		$	—		$	—	$	3,027,121
Interest expense		403,817			—			—			—			—		403,817
Net interest income		2,604,872			—			18,432			—			—		2,623,304
(Reversal) provision for loan losses		(400,000	)		—			122,424			—			—		(277,576	)
Noninterest income (expense)		182,756			—			—			(698,062	)		661,116		145,810
Noninterest expense		3,885,690			1,807,186			336,770			715,153			36,946		6,707,853
Loss before income taxes		(698,062	)		(1,807,186	)		(440,762	)		(1,413,215	)		698,062		(3,661,163	)
Income taxes		—			—			—			—			—		—
Net loss	$	(698,062	)	$	(1,807,186	)	$	(440,762	)	$	(1,413,215	)	$	698,062	$	(3,661,163	)


	Banking		Holding Company (1)			Eliminations			Total
As of September 30, 2013
Cash and due from banks	$	6,225,756	$	3,371,531	$	(1,741,865	)	$	7,855,422
Federal funds sold		10,664,934		—		—			10,664,934
Investment securities		20,620,367		—		—			20,620,367
Loans receivable, net		60,796,956		2,084,886		—			62,881,842
Other real estate owned		1,391,901		1,965,256		—			3,357,157
Property and equipment, net		2,126,945		42,981		—			2,169,926
Other assets		1,002,008		180,971		(23,333	)		1,159,646
Total assets	$	102,828,867	$	7,645,625	$	(1,765,198	)	$	108,709,294

Deposits	$	93,554,364	$	—	$	(1,741,865	)	$	$91,812,499
Securities sold under agreements to repurchase		32,904		—		—			32,904
Accrued and other liabilities		214,688		298,532		(23,333	)		489,887
Shareholders’ equity		9,026,911		7,347,093		—			16,374,004
Total liabilities and shareholders’ equity	$	102,828,867	$	7,645,625	$	(1,765,198	)	$	$108,709,294

(1)

Excludes investment in wholly-owned Bank subsidiary

NOTE 9 – NOTE PAYABLE

In September 2014, the Company received a loan for $600,000 from a board member of the Bank to assist in covering outstanding commitments. The loan is secured by two pieces of real estate owned by the Company with a combined book value of $1.4 million. The terms of this note require monthly interest payments over the next 12 months at a rate of 7% for the first six months and then at a rate of 8% until maturity. The balance of the note, along with any unpaid accrued interest, is due at maturity in September 2015.

NOTE 10 – BORROWINGS

In July 2014, the Bank obtained $5,000,000 in new FHLB advances in order to fund future loan growth. These advances are secured by $13.9 million in collateralized loans. The terms of this note require monthly interest payments through the January 2015 maturity date, at which time the advance will be refinanced or repaid in its entirety.

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

our anticipated strategies for growth and sources of new operating revenues;

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our aim to list our shares of common stock on a nationally recognized securities exchange once eligible;

•

our expectations regarding our operating revenues, expenses, effective tax rates, and other results of operations;

•

our current and future products and services and plans to develop and promote them;

•

our anticipated capital expenditures and our estimates regarding our capital expenditures;

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our liquidity and working capital requirements;

•

increased cybersecurity risks, including potential business disruptions or financial losses;

•

our ability to comply with regulatory rules and restrictions and potential regulatory actions if we fail to comply;

•

changes in economic conditions resulting in, among other things, a deterioration in credit quality;

•

credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

•

credit losses due to loan concentration;

•

the rate of delinquencies and amount of loans charged-off;

•

the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

•

the lack of loan growth in recent years;

•

our ability to attract and retain key personnel;

•

our ability to protect our proprietary technology and intellectual property rights and use, develop, market and otherwise exploit our products and services without infringing or misappropriating the proprietary technology or intellectual property rights of third parties;

•

our ability to retain our existing customers, including our deposit relationships;

•

increases in competitive pressure in the banking and financial services industries;

•

adverse changes in asset quality and resulting credit risk related losses and expenses;

•

changes in the interest rate environment which could reduce anticipated or actual margins;

•

changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry;

•

loss of consumer confidence and economic disruptions resulting from terrorist activities or other military actions;

•

changes occurring in business conditions and inflation;

•

changes in access to funding or increased regulatory requirements with regard to funding;

•

changes in deposit flows;

•

changes in technology;

•

changes in monetary and tax policies;

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changes in accounting policies and practices; and

•

other risks and uncertainties detailed in this report and, from time to time, in our other filings with the SEC.

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

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2013, as filed in our 2013 Form 10-K.

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

Allowance for Loan Losses

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

Other Real Estate Owned and Repossessed Assets

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

Income Taxes

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in our consolidated financial statements and income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and

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

Research and Development

All costs incurred to establish the technological feasibility of computer software to be sold, leased or otherwise marketed as research and development are expensed as incurred. Once technological feasibility has been established, the subsequent costs of producing, coding and testing the products should be capitalized. The expensing of computer software costs is discontinued when the product is available for general release to customers. Currently, the Company has not achieved technological feasibility and is expensing all computer software purchases related to research and development. Once technological feasibility is reached, the Company will capitalize costs as incurred.

Overview

The following discussion describes our results of operations for the three and nine month periods ended September 30, 2014 and 2013 and also analyzes our financial condition as of September 30, 2014.

The Consolidated Company

At September 30, 2014, we had total assets of $102.3 million, a decrease of $2.0 million, or 1.9%, from total assets of $104.3 million at December 31, 2013. The largest components of our total assets are net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $65.8 million, $19.8 million, $2.7 million, $4.1 million and $6.2 million, respectively, at September 30, 2014. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $62.4 million, $20.1 million, $2.5 million, $7.9 million and $6.5 million, respectively, at December 31, 2013.

Our liabilities and shareholders’ equity at September 30, 2014, totaled $91.3 million and $11.0 million, respectively, compared to liabilities of $90.0 million and shareholders’ equity of $14.3 million at December 31, 2013. The principal component of our liabilities is deposits, which were $84.1 million and $89.2 million at September 30, 2014 and December 31, 2013, respectively.

Our net loss was $997,966 for the three months ended September 30, 2014, or $0.05 per share, as slight decrease of $20,134, or 1.9%, compared to a net loss of $1.0 million, or $0.05 per share, for the three months ended September 30, 2013. This decrease in net loss was primarily driven by increases in net interest income and non-interest income, including service fees on deposit accounts and residential loan origination fees, and decreases in real estate owned activity, insurance, data processing, and other expenses and professional fees, as well as a decrease in provisions for loan losses partially offset by increases in compensation and benefits, occupancy, and product research and development expenses.

Our net loss was $4.5 million for the nine months ended September 30, 2014, or $0.22 per share, an increase of $849,708, or 23.2%, compared to net loss of $3.7 million, or $0.18 per share, for the nine months ended September 30, 2013. This increase in net loss was primarily driven by an increase in product research and development expense, and compensation and benefits expense, partially offset by decreases in real estate owned activity and professional fees, as well as a decrease in the reversal of provisions for loan losses.

The Bank

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

At September 30, 2014, we had total assets at the Bank of $99.9 million compared to $99.3 million at December 31, 2013. The largest components of total assets at the Bank are net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $65.8 million, $19.8 million, $1.4 million, $4.1 million and $5.7 million, respectively, at September 30, 2014. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $61.6 million, $20.1 million, $1.4 million, $7.9 million and $5.0 million, respectively, at December 31, 2013. At September 30, 2014, we had total liabilities at the Bank of approximately $89.7 million compared to approximately $89.5 million at December 31, 2013. The largest components of total liabilities at the Bank are deposits and FHLB advances, which were $84.5 million and $5.0 million, respectively.

The Company

The Company’s cash balances, independent of the Bank, were approximately $782,000 and its real estate held for sale was approximately $1.4 million at September 30, 2014 compared to cash balances of approximately $2.3 million and real estate held for sale of $1.1 million at December 31, 2013. In addition, at December 31, 2013, the Company had loans held for investment of approximately $811,000 and loans held for sale of $900,000. The loan held for investment was transferred to other real estate and the held for sale loans were sold prior to June 30, 2014. The decrease in liquid assets of approximately $3.5 million is due primarily to expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $1.3 million and a note payable to a related party of $600,000 which was advanced in September 2014. See “Note 8 – Business Segments” and “Note 9 – Note Payable”, for additional information related to the transaction services segment and the related advance.

Recent Regulatory Developments

Transaction Services

As part of our development plan to build a digital payment technology platform and explore transaction services business opportunities, the Company filed three patent applications with the U.S. Patent and Trademark Office covering concepts associated with mobile wallet messages among different software platforms; entered into multiple contracts with third party technology developers and vendors to support its business operations; and has received approval from the Federal Reserve for an additional ABA number to support its operations, including its transaction services. We may also enter into agreements with vendors, payment networks and payment gateways as well as marketing and distribution partners and work with other banks and financial institutions in offering transaction and payment services or other forms of digital banking services, in each case subject to the discretion of the board of directors and management and the receipt of any necessary regulatory approvals or non-objections.

We have made and plan to continue to make substantial investments in research and development, and we expect to focus our future research and development efforts on enhancing existing products and services and on developing new products and services. We expect to continue to develop technologies and operating functionalities to improve the efficiencies of and reduce the cost of transaction services, mobile and digital payments, data management and compliance services. These services may include expanding or introducing prepaid debit programs, decoupled debit and real time

processing capabilities as well as expanding our traditional debit card issuance programs to generate additional interchange income. We may also seek to develop types of accounts and channels that reduce fraud, credit and settlement risks including near real time settlement accounts as well as those that reduce the types and amount of potential charge-backs. Product offerings may include cloud-based platform services, customized mobile wallets and payment Apps, financial planning and savings Apps, device finance and credit products and interconnectivity and integration web services. They could also include integration, development and engineering services, as well as providing operational, compliance and technology support. These products and services would be designed as separate product offerings, as well as integration services with existing core processing and data management systems, so that the companies may not be required to make wholesale conversions from their existing core processing systems.

We also anticipate expanding marketing and sales capabilities, treasury, funding, risk management and customer support programs which may involve expansion of activities and offices in Greenville, New York City, and other geographic locations as well as forming associations with other banks and financial institutions to establish policies and procedures and infrastructure services for more efficient payment networks and operations. We expect to continue to focus significant research and development efforts on ongoing projects to update the technology platforms for several of our offerings.

Our digital strategy remains subject to our having adequate capital to invest in its development and the support of our banking regulators. See our Risk Factors in our 2013 Form 10-K and in our Current Report on Form 8-K filed with the SEC on July 18, 2014.

Results of Operations

Three months ended September 30, 2014 and 2013

We recorded a net loss of $997,966, or $0.05 per diluted share, for the quarter ended September 30, 2014, compared to a net loss of $1.0 million, or $0.05 per diluted share, for the quarter ended September 30, 2013. The slight change in net loss between comparable periods was primarily driven by increases net interest income and non-interest income, including service fees on deposit accounts and residential loan origination fees, and decreases in real estate owned activity, insurance, data processing and other expenses and professional fees, as well as a decrease in provisions for loan losses, partially offset by increases in compensation and benefits, occupancy, and product research and development expenses. Each of these components is discussed in greater detail below.

During the quarter ended June 30, 2013, the Company purchased several pieces of real estate owned totaling $3.3 million and three loans totaling $2.2 million, from the Bank (under terms that meet the Market Terms Requirement as described in Regulation W covering transactions between affiliates) in order to support a reduction in the Bank’s adversely classified assets ratio. Through June 30, 2014, the Company sold eight pieces of the real estate owned purchased from the Bank for proceeds of approximately $2.1 million, which resulted in an aggregate loss of $1,509,442 to the Company. During the quarter ended September 30, 2014, the Company sold two additional pieces of real estate owned purchased from the Bank for proceeds of $39,707, which resulted in a gain of $12,617 (and an aggregate loss to the Company through September 30, 2014 of $1,496,825). The remaining pieces of real estate owned and loan purchased from the Bank are being actively marketed for sale.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the three months ended September 30, 2014 and 2013. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees are amortized into interest income on loans.


	For the Three Months Ended September 30,
	2014						2013

		Average Balance		Income/ Expense	Yield/ Rate			Average Balance		Income/ Expense	Yield/ Rate
Federal funds sold and other	$	3,356,987	$	7,406	0.88	%	$	14,337,507	$	15,116	0.42	%
Investment securities		19,966,011		126,260	2.54			20,988,844		115,586	2.21
Loans (1)		67,088,432		880,640	5.27			63,771,145		877,959	5.52
Total interest-earning assets	$	90,411,430	$	1,014,306	4.50	%	$	99,097,536	$	1,008,661	4.08	%

NOW accounts	$	7,536,256	$	2,202	0.12	%	$	7,302,108	$	4,417	0.24	%
Savings & money market		38,001,476		22,138	0.23			41,430,317		24,468	0.24
Time deposits (excluding brokered time deposits)		28,654,954		47,801	0.67			35,884,146		67,009	0.75
Brokered time deposits		—		—	—			1,594,095		6,226	1.57
Total interest-bearing deposits		74,192,686		72,141	0.39			86,210,666		102,120	0.48
Borrowings and note payable		4,394,042		5,922	0.54			115,025		41	0.14
Total interest-bearing liabilities	$	78,586,728	$	78,063	0.40	%	$	86,325,691	$	102,161	0.47	%

Net interest spread					4.10	%					3.61	%
Net interest income/ margin			$	936,243	4.15	%			$	906,500	3.67	%

(1)

Nonaccrual loans are included in average balances for yield computations.

For the three months ended September 30, 2014, we recognized $1,014,306 in interest income and $78,063 in interest expense, resulting in net interest income of $936,243, an increase of $29,743, or 3.3%, over the same period in 2013. Average earning assets decreased to $90.4 million for the three months ended September 30, 2014 from $99.1 million for the three months ended September 30, 2013, a decrease of $8.7 million, or 8.8%. This decrease in earning assets was primarily due to a $11.0 million decrease in average federal funds sold and a $1.0 million decrease in average investment securities, partially offset by a $3.3 million increase in average loans between periods. Average interest bearing liabilities decreased to $78.6 million for the three months ended September 30, 2014 from $86.3 million for the three months ended September 30, 2013, a decrease of $7.7 million, or 9.0%. Net interest margin, calculated as annualized net interest income divided by average earning assets, increased from 3.67% for the quarter ended September 30, 2013 to 4.15% for the quarter ended September 30, 2014, primarily due to an increase in yield on earning assets from 4.08% to 4.50% between periods and a decrease in cost of funds from 0.47% to 0.40% between periods due to the mix of liabilities and the timing of their repricing.

We recorded no provision for loan losses for the quarter ended September 30, 2014 compared to the provision for loan losses of $5,795 for the quarter ended September 30, 2013. The allowance as a percentage of gross loans decreased to 1.74% as of September 30, 2014 compared to 2.04% at December 31, 2013. Specific reserves were approximately $258,000 on impaired loans of $2.5 million as of September 30, 2014 compared to specific reserves of approximately $192,000 on impaired loans of $1.5 million as of December 31, 2013. As of September 30, 2014, the general reserve allocation was 1.36% of gross loans not impaired compared to 1.78% as of December 31, 2013. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.”

For the three months ended September 30, 2014, noninterest income was $86,003 compared to $44,238 for the three months ended September 30, 2013, an increase of $41,765, or 94.4%. Noninterest income for the three months ended September 30, 2014 and 2013 was derived from service charges on deposits, customer service fees, and mortgage origination income. The primary contributor for this quarter’s increase was an increase in mortgage origination income of $23,190.

During the quarter ended September 30, 2014, we incurred noninterest expenses of $2.0 million, compared to noninterest expenses of $2.0 million for the quarter ended September 30, 2013, an increase of $57,169, or 2.9%. This increase in noninterest expenses for the three month period ended September 30, 2014 primarily resulted from increases in product research and development expenses of $247,990 and compensation and benefits expenses of $24,713, partially offset by a decrease of $159,061 in real estate owned activity which includes expenses to carry other real estate, gains and losses on sales of other real estate, and write-downs on real estate owned, a decrease in data processing fees of $15,646, a

decrease in insurance expenses of $14,939, and a decrease in other noninterest expenses of $29,363. Compensation and benefits expenses increased due to changes in staffing levels year over year for the quarter ended September 30, 2014.

We did not recognize any income tax benefit or expense for the three months ended September 30, 2014 and 2013. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighing all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During our September 30, 2010 quarterly analysis of the valuation allowance recorded against our deferred tax assets, we determined that it was not more likely than not that our deferred tax assets will be recognized in future years due to the continued decline in credit quality and the resulting impact on net interest margin, increased net losses, and negative impact on capital as a result of provision for loan losses and write-downs on other real estate owned, and booked a 100% valuation allowance against the deferred tax asset. We will continue to analyze our deferred tax assets and related valuation allowance each quarter taking into account performance compared to forecast and current economic or internal information that would impact forecasted earnings. No benefit was recognized on net loss for the quarter ended September 30, 2014 due to the Company’s large cumulative net operating loss carry-forward position as well as the 100% valuation allowance on our deferred tax assets.

Nine months ended September 30, 2014 and 2013

We recorded a net loss of $4.5 million or $0.22 per diluted share, for the nine months ended September 30, 2014, an increase of $849,708 compared to a net loss of $3.7 million, or $0.18 per diluted share, for the nine months ended September 30, 2013. This increase in net loss between comparable periods was primarily driven by increases in several noninterest expense areas, including product research and development expense and compensation and benefits expense, which were partially offset by decreases in real estate owned activity expenses and professional fees, and a decrease in the reversal of provision for loan losses. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the nine months ended September 30, 2014 and 2013. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees are amortized into interest income on loans.


	2014						2013

		Average Balance		Income/ Expense	Yield/ Rate			Average Balance		Income/ Expense	Yield/ Rate
Federal funds sold and other	$	4,678,396	$	23,784	0.68	%	$	12,526,743	$	41,063	0.44	%
Investment securities		20,070,705		393,178	2.64			23,013,336		352,768	2.05
Loans (1)		66,137,954		2,548,961	5.19			66,248,028		2,633,290	5.31
Total interest-earning assets	$	90,887,055	$	2,965,923	4.39	%	$	101,788,107	$	3,027,121	3.97	%

NOW accounts	$	7,110,899	$	7,596	0.14	%	$	7,054,864	$	13,820	0.26	%
Savings & money market		39,376,986		70,362	0.24			43,015,255		107,379	0.33
Time deposits (excluding brokered time deposits)		27,988,773		134,239	0.65			36,706,168		220,237	0.80
Brokered time deposits		519,675		6,034	1.56			1,594,076		18,474	1.55
Total interest-bearing deposits		74,996,333		218,231	0.39			88,374,363		359,910	0.54
Borrowings and note payable		1,552,275		5,996	0.52			3,639,374		43,907	1.61
Total interest-bearing liabilities	$	76,548,608	$	224,227	0.39	%	$	92,013,737	$	403,817	0.59	%

Net interest spread					4.00	%					3.39	%
Net interest income/ margin			$	2,741,696	4.06	%			$	2,623,304	3.44	%

(1)

Nonaccrual loans are included in average balances for yield computations.

For the nine months ended September 30, 2014, we recognized $3.0 million in interest income and $224,227 in interest expense, resulting in net interest income of $2.7 million, an increase of $118,392, or 4.5%, over the same period in 2013. Average earning assets decreased to $90.9 million for the nine months ended September 30, 2014 from $101.8 million for the nine months ended September 30, 2013 a decrease of $10.9 million, or 10.7%. This decrease in earning assets was due to a $7.8 million decrease in average federal funds sold, a $2.9 million decrease in average investment securities and a $110,074 decrease in average loans between periods. Average interest bearing liabilities decreased to $76.5 million for the nine months ended September 30, 2014 from $92.0 million for the nine months ended September 30, 2013 a decrease of $15.5 million, or 16.9%. Net interest margin, calculated as annualized net interest income divided by average earning assets, increased from 3.44% for the nine months ended September 30, 2013 to 4.06% for the nine months ended September 30, 2014, primarily due to an increase in yield on earning assets from 3.97% to 4.39% and a decrease in cost of funds from 0.59% to 0.39% for the same periods, respectively.

A reversal of provision for loan losses of $30,000 was recognized for the nine months ended September 30, 2014 representing a decrease of $247,576, or 89.2%, compared to the reversal of provision of $277,576 for the nine months ended September 30, 2013. The decrease in the reversal of provision for loan losses for the current nine months is due to a decrease in specific reserves as well as the general reserve level. Over the last year, we have seen a decrease in the amount of charge-offs and specific reserves needed due to the apparent stabilization of nonperforming loans. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.”

For the nine months ended September 30, 2014, noninterest income was $338,407 compared to $145,810 for the nine months ended September 30, 2013, an increase of $192,597, or 132.1%, between comparable periods. Noninterest income for the nine months ended September 30, 2014 and 2013 was derived from service charges on deposits, customer service fees, rental income, mortgage origination income and gains on the sale of loans held for sale. The largest contributor for the increase was the gain resulting from the sale of loans held for sale in the amount of $118,452 during the nine months ended September 30, 2014.

During the nine months ended September 30, 2014, we incurred noninterest expenses of $7.6 million, compared to noninterest expenses of $6.7 million for the nine months ended September 30, 2013, an increase of $913,121, or 13.6%. This increase in noninterest expenses resulted primarily from an increase in product research and development expenses of $1.5 million, due to expenses incurred to prepare for the implementation of our new strategic plan. An increase in compensation and benefits of $292,064 also contributed to the increase in noninterest expenses. Compensation and benefits increased due to the filling of vacancies at the Bank and hiring new employees at the Company. Real estate owned activity, which includes expenses to carry other real estate, gains and losses on sales of other real estate, and write-downs on real estate owned, decreased $640,791.

We did not recognize any income tax benefit for the nine months ended September 30, 2014 or 2013.

Assets and Liabilities

General

Total assets as of September 30, 2014 and December 31, 2013 were $102.3 million and $104.3 million, respectively, a decrease of $2.0 million. Net loans increased $3.4 million, which was the result of approximately $4.5 million of net loan originations, partially offset by $1.1 million in loans transferred to other real estate owned. Other real estate owned increased $235,387 due to the repossession of three properties of approximately $1.1 million, which was offset by the sale of two properties for proceeds of approximately $505,000 and net write-downs of approximately $416,000 taken during the nine months ended September 30, 2014. Investment securities decreased $353,958 due to $1.1 million in paydowns, $185,983 in amortization and $915,250 in change in unrealized losses. Cash and due from banks decreased $389,673 and federal funds sold decreased $3.8 million. At September 30, 2014, our total assets consisted principally of $6.2 million in cash and due from banks, $19.8 million in investment securities, $65.8 million in net loans, $4.1 million in fed funds sold, $2.4 million in property and equipment and $2.7 million in other real estate owned and repossessed assets. Our management closely monitors and seeks to maintain appropriate levels of interest-earning assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and demand.

Liabilities at September 30, 2014 totaled $91.3 million, representing an increase of $1.3 million compared to December 31, 2013, and consisted principally of $84.1 million in deposits, $5.0 million in FHLB borrowings, a $600,000 note payable and $1.5 million in accounts payable and accrued expenses. Our accrued expenses consisted primarily of accrued legal and accounts payable, accounting and tax fees, and FDIC assessments. At September 30, 2014, shareholders’ equity was $11.0 million compared to $14.3 million at December 31, 2013. The decrease in shareholders’ equity was due to a net loss of $4.5

million and stock option expense of $328,687 for the nine months ended September 30, 2014 partially offset by a reduction of $915,250 in unrealized losses on investment securities available for sale.

Loans

Since loans typically provide higher interest yields than other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio. At September 30, 2014, our gross loan portfolio consisted primarily of $33.0 million of commercial real estate loans, $14.5 million of commercial business loans, and $19.6 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2013 Form 10-K. We experienced net originations of approximately $4.5 million during the nine months ended September 30, 2014, due to higher market demand, while continuing to carefully consider liquidity needs and conservative credit risk management.

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


	September 30, 2014			% of Total			December 31, 2013			% of Total
Real estate:
Commercial	$	24,741,347			36.9	%	$	21,795,047			34.2	%
Construction and development		8,237,563			12.3			10,053,100			15.8
Single and multifamily residential		18,201,506			27.2			18,757,484			29.5
Total real estate loans		51,180,416			76.4			50,605,631			79.5
Commercial business		14,548,154			21.7			12,170,698			19.1
Consumer		1,354,233			2.0			999,941			1.6
Deferred origination fees, net		(132,314	)		(0.1	)		(106,134	)		(0.2	)
Gross loans, net of deferred fees		66,950,489			100.0	%		63,670,136			100.0	%
Less allowance for loan losses		(1,167,703	)					(1,301,886	)
Loans, net	$	65,782,786					$	62,368,250

The largest component of our loan portfolio at September 30, 2014 was $24.7 million of commercial real-estate loans, which represented 36.9% of the portfolio. The remainder of our loan portfolio consisted primarily of $18.2 million of single and multifamily residential loans, $8.2 million of construction and development loans, and $14.5 million of commercial business loans.

Loan Performance and Asset Quality

The downturn in general economic conditions over the past several years has resulted in increased loan delinquencies, defaults and foreclosures within our loan portfolio although the last 18 months have seen a stabilization in delinquencies, defaults and foreclosures and an increase in recoveries. The declining real estate market has had a significant impact on the performance of our loans secured by real estate. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure. Although the real estate collateral provides an alternate source of repayment in the event of default by the borrower, in our current market the value of the collateral has deteriorated during the time the credit is extended. There is a risk that this trend will continue, which could result in additional loss of earnings, increases in our provision for loan losses and loan charge-offs.

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

Refer to Note 5, Loans, for a table summarizing delinquencies and nonaccruals, by portfolio class, as of September 30, 2014 and December 31, 2013. Total delinquent and nonaccrual loans decreased from $2.0 million at December 31, 2013 to $1.5 million at September 30, 2014, a decrease of $504,715, or 25.6%. This decrease was a result of movement in several categories. Nonaccrual loans decreased during the nine months due to our repossession of single and multifamily residential real estate and construction and development properties in satisfaction of loans as well as due to one loan being brought back to accrual status. At September 30, 2014, nonaccrual loans represented 0.9% of gross loans compared to 2.2% of gross loans as of December 31, 2013. Loans past due 30-89 days are considered potential problem loans and amounted to $658,284 and $566,972 at September 30, 2014 and December 31, 2013, respectively, due to four loans moving from current status to past due, partially offset by two loans moving to nonaccrual status.

Another method used to monitor the loan portfolio is credit grading. As part of the loan review process, loans are given individual credit grades, representing the risk we believe is associated with the loan balance. Credit grades are assigned based on factors that impact the collectability of the loan, the strength of the borrower, the type of collateral, and loan performance. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. Refer to Note 5, Loans, for a table summarizing management’s internal credit risk grades, by portfolio class, as of September 30, 2014 and December 31, 2013.

Loans graded one through four are considered “pass” credits. Approximately 92% of the loan portfolio had a credit grade of “pass” at September 30, 2014 and December 31, 2013. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade.

Loans with a credit grade of five are not considered classified; however they are categorized as a special mention or watch list credit, and are considered potential problem loans. This classification is utilized by us when we have an initial concern about the financial health of a borrower. These loans are designated as such in order to be monitored more closely than other credits in our portfolio. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either reclassify the loan as “substandard” or back to its original risk rating after a review of the information. There are times when we may leave the loan on the watch list, if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we determine to review the loan on a more regular basis. Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of September 30, 2014, we had loans totaling $1.7 million on the watch list compared to $1.5 million as of December 31, 2013, an increase of approximately $237,633 or 15.9%. This increase in watch list loans was due to one loan being deemed classified partially offset by two loans being deemed impaired during the nine months ended September 30, 2014.

Loans graded six or greater are considered classified credits. At September 30, 2014 and December 31, 2013, classified loans totaled $3.3 million and $3.4 million, respectively. The decrease in this category of $40,337, or 1.2%, during the nine months ended September 30, 2014 is primarily due to the repossession of four properties totaling $1.1 million as well as one loan for $85,000 being removed from the classified status due to performance, partially offset by five new loans added to the classified list for $1.8 million and paydowns of approximately $334,000. Classified credits are evaluated for impairment on a quarterly basis.

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

At September 30, 2014, impaired loans totaled $2.5 million, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. As of September 30, 2014, we had loans totaling $774,800 that were classified in accordance with our loan rating policies but

were not considered impaired. Refer to Note 5, Loans, for a table summarizing information relative to impaired loans, by portfolio class at September 30, 2014 and December 31, 2013.

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

There were no loans modified as troubled debt restructurings within the previous 12-month period for which there was a payment default during the nine months ended September 30, 2014.

Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. At September 30, 2014, the allowance for loan losses was $1.2 million, or 1.74% of gross loans, compared to $1.3 million at December 31, 2013, or 2.04% of gross loans.

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

Our allowance for loan losses consists of both specific and general reserve components. The specific reserve component relates to loans that are impaired loans as defined in FASB ASC Topic 310, “Receivables”. Loans determined to be impaired are excluded from the general reserve calculation described below and evaluated individually for impairment. Impaired loans totaled $2.5 million at September 30, 2014, with an associated specific reserve of $258,189. See Note 5, Loans, as well as the above discussion under “Loan Performance and Credit Quality” for additional information related to impaired loans.

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

Refer to Note 5, Loans, for a table summarizing activity related to our allowance for loan losses for the quarter ended September 30, 2014 and 2013, by portfolio segment. As of September 30, 2014, the allowance for loan losses was $1.2 million, or 1.74% of gross loans, compared to $1.3 million, or 2.04% of gross loans, as of December 31, 2013 and $1.4 million, or 2.19% of gross loans, as of September 30, 2013. We recognized a reversal of provision for loan losses of $30,000 for the nine months ended September 30, 2014 and a reversal of provision for loan losses of $277,576 for the nine months ended September 30, 2013. Net charge-offs for the nine months ended September 30, 2014 were $104,183 compared to $173,203 for the nine months ended September 30, 2013. The charge-offs during the nine months ended September 30, 2014 related to three commercial loans and write-downs of collateral to fair value against specific reserves.

Partial charge-offs were based on recent appraisals and evaluations on one residential loan and one construction and development loan in the process of foreclosure. Loans with partial charge-offs are typically considered impaired loans and may remain on nonaccrual status.

Other Real Estate Owned and Repossessed Assets

At September 30, 2014 and December 31, 2013, we had approximately $2.7 and $2.5 million in other real estate owned, respectively. During the nine months ended September 30, 2014, we completed the sale of five pieces of real estate. The sale of those pieces of real estate resulted in a gain of approximately $14,274 and is included in the gain (loss) below. The following table summarizes changes in other real estate owned and repossessed assets for the nine months ended September 30, 2014 and 2013:


	2014			2013
Balance at beginning of period	$	2,508,170		$	4,468,294
Repossessed property acquired in settlement of loans		1,143,000			1,351,257
Proceeds from sales of repossessed property		(505,263	)		(1,353,282	)
Gain (loss) on sale and write-downs of repossessed property, net		(402,350	)		(1,109,112	)
Balance at end of period	$	2,743,557		$	3,357,157

As of September 30, 2014, other real estate owned consisted of residential land lots valued at $743,200, 1-4 family residential dwellings valued at $57,357, commercial land valued at $710,000 and commercial office space valued at $1.2 million. During the quarter ended June 30, 2013, the Bank completed an asset sale to the Company (under terms that meet the Market Terms Requirement as described in Regulation W covering transactions between affiliates) for a purchase price of $5.5 million. Real estate owned of $3.3 million was transferred to the Company as a result of the sale. No gains or losses were recognized as a result of the asset sale as the assets were sold at fair value. Through June 30, 2014, the Company sold eight pieces of the real estate owned purchased from the Bank for proceeds of approximately $2.1 million, which resulted in an aggregate loss of $1,509,442 to the Company. During the quarter ended September 30, 2014, the Company sold two additional pieces of real estate owned purchased from the Bank for proceeds of $39,707, which resulted in a gain of $12,617 (and an aggregate loss to the Company through September 30, 2014 of $1,496,825). These assets are being actively marketed with the primary objective of liquidating the collateral at a level which most accurately approximates fair value and allows recovery of as much of the unpaid principal loan balance as possible upon the sale of the asset within a reasonable period of time. Based on currently available valuation information, the carrying value of these assets is believed to be representative of their fair value less estimated costs to sell, although there can be no assurance that the ultimate proceeds from the sale of these assets will be equal to or greater than their carrying values, particularly in the current real estate environment.

Deposits

Our primary source of funds for loans and investments is our deposits. At September 30, 2014, we had $84.1 million in deposits, representing a decrease of $5.0 million compared to December 31, 2013. Deposits at September 30, 2014 consisted primarily of $17.4 million in demand deposit accounts, $36.7 million in money market accounts and $30.0 million in time deposits. Due to previous regulatory constraints beginning in 2010, we were no longer able to accept brokered time deposits without prior approval from the FDIC. Accordingly, beginning in 2010 we began reducing our reliance on brokered time deposits. At December 31, 2013, we had $1.6 million in brokered time deposits. We had no brokered time deposits as of September 30, 2014 as the remaining $1.6 million time deposit matured and was not renewed. We plan to continue to not utilize brokered time deposits and reduce our reliance on other noncore funding sources, while focusing our efforts to gather core deposits in our local market. Our loan-to-deposit ratio was 79.6% and 71.4% at September 30, 2014 and December 31, 2013, respectively.

Borrowings

We use borrowings to fund growth of earning assets in excess of deposit growth. At September 30, 2014 and December 31, 2013, there were $37,415 and $96,879, respectively, in borrowings representing customer repurchase agreements. FHLB advances accounted for $5.0 million of total borrowings as of September 30, 2014. There were no

FHLB advances at December 31, 2013. In September 2014, the Company received a loan for $600,000 from a board member of the Bank to assist in covering outstanding commitments related to the transaction services segment. The loan is secured by two pieces of real estate owned by the Company with a combined book value of $1.4 million. The terms of this note require monthly interest payments over the next twelve months at a rate of 7% for the first six months and then at a rate of 8% until maturity. The balance of the note, along with any unpaid accrued interest, is due at maturity in September 2015.

Liquidity

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

The Company

The Company’s cash balances, independent of the Bank, were approximately $782,000 and its real estate held for sale (which serve as collateral for the Company’s note payable) was $1.4 million at September 30, 2014 compared to cash balances of approximately $2.3 million and real estate held for sale of $1.1 million at December 31, 2013. In addition, at December 31, 2013, the Company had loans held for investment of approximately $811,000 and loans held for sale of approximately $900,000. The loan held for investment was transferred to other real estate and the held for sale loans were sold prior to June 30, 2014. The decrease in liquid assets of approximately $3.5 million is due primarily to expenses incurred related to the transaction services segment. In addition, the Company has payables due of $1.3 million and a note payable by a related party of $600,000 which was advanced in September 2014. See “Note 8 – Business Segments”, for additional information related to the transaction services segment.

The Bank

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $13.8 million as of September 30, 2014.

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

The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio and was 29.3% at September 30, 2014 compared to 33.1% as of December 31, 2013. The decrease in liquid assets is due primarily to the decrease in cash and due from bank and fed funds sold, primarily due to losses recognized related to the transaction services segment. See Note 8 – Business Segments, for additional information related to the transaction services segment.

Impact of Off-Balance Sheet Instruments

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2014, we had issued commitments to extend credit of $11.2 million through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Commitments and Contingencies

As of September 30, 2014, there were $893,000 in commitments, primarily for systems and development software, most of which will be expensed in 2014. One commitment for $170,000 was due in October 2014, but has not yet been paid.

Capital Resources

Total shareholders' equity decreased from $14.3 million for December 31, 2013 to $11.0 million for September 30, 2014 due to a net loss of $4,510,871, partially offset by compensation expense related to stock options of $328,687 granted, and by a $915,250 change in unrealized loss on investment securities available for sale. We believe that our capital is sufficient to fund the activities of our Bank’s operations; however, due to the uncertainty of timing and amount of cash that might be received from the conversion of the held for sale assets, the current commitments outstanding, the current run rate on fixed expenses, the current payables, and the prohibition within Regulation W, we believe that the Company does not have sufficient working capital to continue to fund its current level of activities without raising additional funding.

Our Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. However, the Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies,” which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC. Although our class of common stock is registered under Section 12 of the Securities Exchange Act, we believe that because our stock is not listed on any exchange or otherwise actively traded, the Federal Reserve Board will interpret its guidelines to mean that we qualify as a small bank holding company. Nevertheless, our Bank remains subject to these capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as

calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital of the Bank consists of common shareholders' equity, excluding the unrealized gain or loss on securities available for sale, less certain intangible assets. The Bank's Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total risk-based capital.

The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

See also additional discussion above under “Recent Regulatory Developments” for more information regarding our required capital ratios.

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at September 30, 2014 and December 31, 2013.


						Target Capitalized Requirement					Adequately Capitalized Requirement					Well Capitalized Requirement
	Actual					Minimum					Minimum					Minimum
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2014
Total Capital (to risk weighted assets)	$	11,455,000		15.4	%	$	8,942,000		12.0	%	$	5,961,000		8.0	%	$	7,451,000	10.0	%
Tier 1 Capital (to risk weighted assets)		10,521,000		14.1			7,451,000		10.0			2,981,000		4.0			4,471,000	6.0
Tier 1 Capital (to average assets)		10,521,000		10.7			8,837,000		9.0			3,927,000		4.0			4,909,000	5.0

As of December 31, 2013
Total Capital (to risk weighted assets)	$	11,201,000		15.7	%	$	8,546,000		12.0	%	$	5,698,000		8.0	%	$	7,122,000	10.0	%
Tier 1 Capital (to risk weighted assets)		10,307,000		14.5			7,122,000		10.0			2,849,000		4.0			4,273,000	6.0
Tier 1 Capital (to average assets)		10,307,000		10.2			9,082,000		9.0			4,036,000		4.0			5,045,000	5.0

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable

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

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

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

SIGNATURES

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


	Date: November 14, 2014	By: /s/Gordon A. Baird
		Gordon A. Baird
		Chief Executive Officer
		(Principal Executive Officer)



		By: /s/Martha L. Long
		Martha L. Long
		Chief Financial Officer
		(Principal Financial Officer and Accounting Officer)

EXHIBIT INDEX

Exhibit

Number

Description

31.1

Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2

Rule 13a-14(a) Certification of the Principal Financial Officer.

Section 1350 Certification.

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for nine months ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements

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