Independence Bancshares, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Independence Bancshares, Inc.	Financial_Report.xls
EX-31.1 - EX-31.1 - Independence Bancshares, Inc.	exhibit31-1.htm
EX-31.2 - EX-31.2 - Independence Bancshares, Inc.	exhibit31-2.htm
EX-32 - EX-32 - Independence Bancshares, Inc.	exhibit32.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

		For the Quarterly Period ended March 31, 2015

OR

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

		For the Transition Period from _________to_________

Commission File No. 000-51907

Independence Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,502,760 shares of common stock, $.01 par value per share, were issued and outstanding as of May 13, 2015.

Independence Bancshares, Inc.

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	March 31, 2015			December 31, 2014
	(unaudited)			(audited)
Assets
Cash and due from banks	$	5,790,259		$	5,261,080
Federal funds sold		4,124,000			5,643,000
Investment securities available for sale		15,201,271			15,615,526
Non-marketable equity securities		384,250			609,650
Loans, net of allowance for loan losses of $989,509 and $1,032,776,
respectively		66,980,651			67,994,667
Accrued interest receivable		257,730			291,288
Property and equipment, net		2,336,603			2,384,007
Other real estate owned and repossessed assets		2,357,100			2,557,457
Other assets		541,783			355,307
Total assets	$	97,973,647		$	100,711,982

Liabilities
Deposits:
Non-interest bearing	$	10,773,752		$	11,016,882
Interest bearing		75,005,743			71,857,781
Total deposits		85,779,495			82,874,663

Federal Home Loan Bank advances		-			5,000,000
Note payable		149,774			600,000
Securities sold under agreements to repurchase		42,272			153,603
Accrued interest payable		9,390			8,226
Accounts payable and accrued expenses		2,800,850			2,664,910
Total liabilities		88,781,781			91,301,402

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		35,204,968			35,124,151
Accumulated other comprehensive income		65,264			1,154
Accumulated deficit		(26,283,394	)		(25,919,753	)
Total shareholders’ equity		9,191,866			9,410,580
Total liabilities and shareholders’ equity	$	97,973,647		$	100,711,982

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
	March 31
	2015			2014
Interest income
Loans	$	827,464		$	813,136
Investment securities		94,638			135,697
Federal funds sold and other		9,288			8,891
Total interest income		931,390			957,724

Interest expense
Deposits		74,956			74,694
Borrowings		10,335			22
Total interest expense		85,291			74,716

Net interest income		846,099			883,008
Provision for loan losses		-			-

Net interest income after provision for loan losses		846,099			883,008

Non-interest income
Service fees on deposit accounts		21,051			9,158
Residential loan origination fees		32,874			45,720
Gain on sale of loans held for sale		-			118,452
Gain on sale of investment securities		41,148			-
Other income		49,133			11,095
Total non-interest income		144,206			184,425

Non-interest expenses
Compensation and benefits		646,727			688,846
Real estate owned activity		8,115			99,674
Occupancy and equipment		159,853			156,078
Insurance		54,434			83,970
Data processing and related costs		81,813			85,864
Professional fees		114,923			184,213
Product research and development expense		195,932			1,029,921
Other		87,069			84,853
Total non-interest expenses		1,348,866			2,413,419

Loss before income tax expense (benefit)		(358,561	)		(1,345,986	)

Income tax expense (benefit)		5,080			-

Net loss	$	(363,641	)	$	( 1,345,986	)

Other comprehensive income (loss), net of tax
Unrealized gain on investment securities available for sale,
net of tax		91,268			330,165
Reclassification adjustment included in net income, net of
tax		(27,158	)		-
Other comprehensive income		64,110			330,165

Total comprehensive loss	$	(299,531	)	$	(1,015,821	)
Loss per common share – basic and diluted	$	(.02	)	$	(.07	)

Weighted average common shares outstanding – basic and
diluted		20,502,760			20,502,760

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, 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	-		-		385,508		-			-			385,508
Net loss	-		-		-		-			(6,500,256	)		(6,500,256	)
Other comprehensive income	-		-		-		1,217,872			-			1,217,872

December 31, 2014	20,502,760	$	205,028	$	35,124,151	$	1,154		$	(25,919,753	)	$	9,410,580

December 31, 2014	20,502,760	$	205,028	$	35,124,151	$	1,154		$	(25,919,753	)	$	9,410,580
Compensation expense related to
stock options granted	-		-		80,817		-			-			80,817
Net loss	-		-		-		-			(363,641	)		(363,641	)
Other comprehensive income	-		-		-		64,110			-			64,110

March 31, 2015	20,502,760	$	205,028	$	35,204,968	$	65,264		$	(26,283,394	)	$	9,191,866

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

Independence Bancshares, Inc.

Consolidated Statements of Cash Flows
(unaudited)

	Three Months Ended
	March 31,
	2015			2014
Operating activities
Net loss	$	(363,641	)	$	(1,345,986	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation		54,030			52,126
Amortization of investment securities discounts/premiums, net		48,462			61,451
Stock option expense related to stock options granted		80,817			127,027
Net changes in fair value and (gains) losses on other real estate owned and
repossessed assets		(17,177	)		65,456
Gain on sale of loans held for sale		-			(118,452	)
Gain on sale of investment securities		(41,148	)		-
(Increase) decrease in other assets, net		(152,918	)		372,561
Increase (decrease) in other liabilities, net		104,078			(178,007	)
Net cash used in operating activities		(287,497	)		(963,824	)

Investing activities
Net (increase) decrease in loans		714,016			(2,197,195	)
Proceeds from sale of loans held for sale		-			1,033,000
Repayments of investment securities available for sale		270,790			337,765
Maturities and sales of investment securities available for sale		533,287			-
Purchases of investment securities available for sale		(300,000	)		-
Redemption of non-marketable equity securities, net		225,400			60,500
Purchase of property, equipment and software		(6,626	)		(13,360	)
Proceeds from sale of other real estate owned and repossessed assets		517,534			93,704
Net cash provided by (used in) investing activities		1,954,401			(685,586	)

Financing activities
Increase (decrease) in deposits, net		2,904,832			(3,605,846	)
Repayments on borrowings		(5,000,000	)		-
Repayments on note payable		(450,226	)		-
Decrease in securities sold under agreements to repurchase		(111,331	)		(59,862	)
Net cash (used in) provided by financing activities		(2,656,725	)		(3,665,708	)

Net decrease in cash and cash equivalents		(989,821	)		(5,315,118	)

Cash and cash equivalents at beginning of the period		10,904,080			14,421,955

Cash and cash equivalents at end of the period	$	9,914,259		$	9,106,837

Supplemental information:
Cash paid for
Interest	$	84,127		$	74,155
Schedule of non-cash transactions
Increase in unrealized gain on investment securities	$	97,137		$	330,165
Loans transferred to other real estate owned and repossessed assets	$	300,000		$	-

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 to conduct general banking business in Greenville, South Carolina. On May 31, 2005, the Company sold 2,085,010 shares of its common stock in its initial public offering. All shares were sold at $10.00 per share. The offering raised approximately $20.5 million, net of offering costs. On December 31, 2012, the Company sold 17,648,750 shares of its common stock to certain accredited investors in the Private Placement (the “Private Placement”), which equated to gross proceeds of $14.1 million. All shares were sold at $0.80 per share. On August 1, 2013, the Company sold 769,000 shares of its common stock at a price of $0.80 per share to certain existing shareholders in a follow-on offering for gross proceeds of approximately $615,200 (the “Follow-on Offering”). The Bank operates three full service branch offices in Greenville, South Carolina.

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. These statements have been prepared assuming that the Company will continue as a going concern. The Company has reported losses from operations for all of 2014 and the three months ended March 31, 2015. The Company’s short term liabilities are greater than its short term assets (independent of assets and liabilities held by the Bank). See Note 2 about the Company’s liquidity and capital considerations. Without raising additional capital, the Company will not be able to sustain its current rate of investment, operations and business. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and my not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management's Discussion and Analysis in this Form 10-Q. Operating results for the three month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The Company’s ability to raise capital will depend on conditions in the capital markets, which are outside of the control of management, as well as the Company’s financial condition, business plan, regulatory status, management, customer activity and market trends. There is a risk the Company will not be able to raise the capital it needs at all or upon favorable terms. If the Company cannot raise this additional capital, management will not be able to implement parts of its business objectives.

Reclassifications

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

Use of Estimates

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

Business Segments

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

Subsequent Events

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

NOTE 2 – LIQUIDITY AND CAPITAL CONSIDERATIONS

The Company

The Company’s cash balances, independent of the Bank, were approximately $21,000 and its real estate held for sale (which serves as collateral for the Company’s note payable) was $754,100 at March 31, 2015 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The decrease in liquid assets of approximately $268,000 is due primarily to expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $2.7 million and a note payable to a related party of $149,774 (secured by the real estate held for sale by the Company) 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. Without raising additional capital, the Company will not be able to sustain its current rate of investment, operations and business. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and my not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We currently have $9.9 million in cash and fed funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at March 31, 2015 amounted to $15.2 million, or 15.5% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At March 31, 2015, $3.2 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 March 31, 2015, we had collateral that would support approximately $18.7 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $12.9 million as of March 31, 2015.

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 2015. 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 25.7% at March 31, 2015 compared to 26.3% as of December 31, 2014. The decrease in liquidity is due primarily to the decrease in cash and due from bank and fed funds sold, primarily due to the repayment of the FHLB advances. See “Note 10 – Borrowings” for additional detail related to the FHLB advances.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For further information refer to the consolidated financial statements and footnotes thereto included in our 2014 Form 10K as filed with the SEC.

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

At March 31, 2015 and December 31, 2014, the Company had restricted cash totaling $2,000 with the Federal Home Loan Bank (“FHLB”) of Atlanta. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Net Loss per Common Share - Basic loss per common share represents net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. For the three month periods ended March 31, 2015 and March 31, 2014, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

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

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

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

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

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

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

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

For the three month period ended March 31, 2015, we recognized $5,080 in state income tax expense due to our net operating income in 2014 at the Bank. We did not recognize any income tax benefit or expense for the three month period ended March 31, 2014 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. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

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

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

In 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 will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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.

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

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

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:

	March 31, 2015
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Government-sponsored mortgage-backed	$	6,771,877	$	93,648	$	(86,102	)	$	6,779,423
Collateralized mortgage-backed		2,039,079		-		(19,027	)		2,020,052
Municipals, tax-exempt		4,976,280		99,451		(27,310	)		5,048,421
Municipals, taxable		1,315,149		38,226		-			1,353,375
Total investment securities	$	15,102,385	$	231,325	$	(132,439	)	$	15,201,271

	December 31, 2014
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Government-sponsored mortgage-backed	$	7,597,334	$	122,491	$	(118,308	)	$	7,601,517
Collateralized mortgage-backed		2,040,478		-		(57,518	)		1,982,960
Municipals, tax-exempt		4,658,532		68,643		(30,179	)		4,696,996
Municipals, taxable		1,317,433		16,620		-			1,334,053
Total investment securities	$	15,613,777	$	207,754	$	(206,005	)	$	15,615,526

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

	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	$	716,703	$	1,762	$	2,481,990	$	84,340	$	3,198,693	$	86,102
Collateralized mortgage-backed		-		-		2,020,052		19,027		2,020,052		19,027
Municipals, tax-exempt		327,675		8,124		1,078,880		19,186		1,406,555		27,310
Total temporarily impaired securities	$	1,044,378	$	9,886	$	5,580,922	$	122,553	$	6,625,300	$	132,439

The following table presents information regarding securities with unrealized losses at December 31, 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	$	-	$	-	$	3,247,141	$	118,308	$	3,247,141	$	118,308
Collateralized mortgage-backed		-		-		1,982,960		57,518		1,982,960		57,518
Municipals, tax-exempt		-		-		1,072,090		30,179		1,072,090		30,179
Total temporarily impaired securities	$	-	$	-	$	6,302,191	$	206,005	$	6,302,191	$	206,005

At March 31, 2015, investment securities with a fair value of $1.0 million and unrealized losses of $9,886 had been in a continuous loss position for less than twelve months. At March 31, 2015, investment securities with a fair value of approximately $5.6 million and unrealized losses of $122,553 had been in a continuous loss position for more than one year. All remaining investment securities were in an unrealized gain position. The Company believes, based on industry analyst reports and credit ratings that the deterioration in the fair value of these investment securities available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company has the ability and intent to hold these securities until such time as the values recover or the securities mature. At December 31, 2014, investment securities with a fair value of approximately $6.3 million and unrealized losses of $206,005 had been in a continuous loss position for more than one year. All remaining investment securities were in an unrealized gain position.

The amortized costs and fair values of investment securities available for sale at March 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.

	March 31, 2015
	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		2,826,228		2,830,142
Due after ten years		12,276,157		12,371,129
Total investment securities	$	15,102,385	$	15,201,271

NOTE 5 – LOANS

At March 31, 2015, our gross loan portfolio consisted primarily of $33.3 million of commercial real estate loans, $16.5 million of commercial business loans, and $18.3 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2014 10-K.

During the quarter ended March 31, 2014, two loans held by the Company which were classified as held for sale and as Troubled Debt Restructurings (“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. During 2014, the one remaining loan held by the Company was transferred into other real estate owned at its remaining outstanding principal balance at the time of transfer of approximately $809,000. On March 5, 2015, one nonaccrual loan at the Bank for $343,266 was transferred to other real estate owned for $300,000, net of a specific reserve, which includes $34,327 in selling costs, of $43,266. The specific reserve was included in the December 31, 2014 allowance amounts.

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 March 31, 2015 and December 31, 2014.

	Single and multifamily residential real estate		Construction and development		Commercial real estate - other		Commercial business		Consumer		Total
March 31, 2015
30-59 days past due	$	266,866	$	39,096	$	795,544	$	111,669	$	-	$	1,213,175
60-89 days past due		-		-		-		4,074		-		4,074
Nonaccrual		-		-		190,790		-		-		190,790
Total past due and nonaccrual		266,866		39,096		986,334		115,743		-		1,408,039
Current		16,766,303		8,585,182		23,699,965		16,370,797		1,288,995		66,711,242
Total loans (gross of	$	17,033,169	$	8,624,278	$	24,686,299	$	16,486,540	$	1,288,995	$	68,119,281
deferred fees)
Deferred fees												(149,121	)
Loan loss reserve												(989,509	)
Total Loans, net											$	66,980,651

	Single and multifamily residential real estate		Construction and development		Commercial real estate - other		Commercial business		Consumer		Total
December 31, 2014
30-59 days past due	$	188,033	$	39,561	$	-	$	23,938	$	-	$	251,532
60-89 days past due		-		-		-		9,129		-		9,129
Nonaccrual		-		-		534,057		-		-		534,057
Total past due and nonaccrual		188,033		39,561		534,057		33,067		-		794,718
Current		17,885,396		8,385,892		24,712,339		16,026,015		1,372,906		68,382,548
Total loans (gross of	$	18,073,429	$	8,425,453	$	25,246,396	$	16,059,082	$	1,372,906	$	69,177,266
deferred fees)
Deferred fees												(149,823	)
Loan loss reserve												(1,032,776	)
Total Loans, net											$	67,994,667

At March 31, 2015 and December 31, 2014, there were nonaccrual loans of $190,790 and $534,057, respectively. Foregone interest income related to nonaccrual loans equaled $5,238 for the three months ended March 31, 2015. Foregone interest income related to nonaccrual loans equaled $12,321 for the three months ended March 31, 2014, which was offset by discount amortization of $13,836 recognized on one loan which was moved from nonaccrual to accrual status, for a total of $1,515 interest income recognized on loans. No interest income was recognized on nonaccrual loans during the three months ended March 31, 2015. At March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
March 31, 2015	real estate		development		other		business		Consumer		Total
Pass Loans	$	10,179,054	$	1,431,555	$	-	$	40,000	$	1,288,995	$	12,939,604
Grade 1 - Prime		-		-		-		-		-		-
Grade 2 - Good		-		-		-		145,881		-		145,881
Grade 3 - Acceptable		1,368,247		1,412,075		8,665,092		7,054,417		-		18,499,831
Grade 4 – Acceptable w/ Care		4,478,046		5,381,579		14,444,835		8,163,173		-		32,467,633
Grade 5 – Special Mention		789,590		81,344		639,889		792,721		-		2,303,544
Grade 6 - Substandard		218,232		317,725		936,483		290,348		-		1,762,788
Grade 7 - Doubtful		-		-		-		-		-		-
Total loans (gross of	$	17,033,169	$	8,624,278	$	24,686,299	$	16,486,540	$	1,288,995	$	68,119,281
deferred fees)

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
December 31, 2014	real estate		development		other		business		Consumer		Total
Pass Loans	$	10,739,155	$	1,362,322	$	-	$	-	$	1,341,699	$	13,443,176
Grade 1 - Prime		-		-		-		-		-		-
Grade 2 - Good		-		-		-		1,652,739		-		1,652,739
Grade 3 - Acceptable		2,594,126		1,284,107		9,123,260		4,629,684		31,207		17,662,384
Grade 4 – Acceptable w/ Care		3,792,456		5,277,692		14,184,482		9,754,850		-		33,009,480
Grade 5 – Special Mention		-		82,413		648,152		-		-		730,565
Grade 6 - Substandard		947,692		418,919		1,290,502		21,809		-		2,678,922
Grade 7 - Doubtful		-		-		-		-		-		-
Total loans (gross of	$	18,073,429	$	8,425,453	$	25,246,396	$	16,059,082	$	1,372,906	$	69,177,266
deferred fees)

Loans graded one through four are considered “pass” credits. At March 31, 2015, approximately 94% of the loan portfolio had a credit grade of “pass” compared to 95% at December 31, 2014. 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 March 31, 2015, we had loans totaling $2.3 million classified as special mention compared to $730,565 as of December 31, 2014. 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 March 31, 2015, substandard loans totaled $1.8 million, with all loans being collateralized by real estate compared to $2.7 million at December 31, 2014. 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 March 31, 2015, impaired loans totaled $1.7 million, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Impaired loans decreased $353,519 from December 31, 2014 due to one loan being transferred to other real estate owned for $300,000, net of charge-offs of $43,266 and approximately $10,000 in loan balance reductions through pay downs during the three months ended March 31, 2015. 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 March 31, 2015, we had loans totaling approximately $826,000 that were classified in accordance with our loan rating policies but were not considered impaired. The following table summarizes information relative to impaired loans, by portfolio class, at March 31, 2015 and December 31, 2014.

	Unpaid						Average		Year to date
	principal		Recorded		Related		impaired		interest
	balance		investment		allowance		investment		income
March 31, 2015
With no related allowance recorded:
Single and multifamily residential real estate	$	725,590	$	725,590	$	-	$	221,047	$	44,239
Construction and development		-		-		-		324,780		-
Commercial real estate - other		190,791		190,791		-		695,763		-
Commercial business		-		-		-		8,578		-
With related allowance recorded:
Single and multifamily residential real estate		-		-		-		665,220		-
Construction and development		-		-		-		166,477		-
Commercial real estate - other		745,693		745,693		34,693		210,088		8,914
Commercial business		-		-		-		-		-
Consumer		-		-		-		-		-
Total:
Single and multifamily residential real estate		725,590		725,590		-		886,267		44,239
Construction and development		-		-		-		491,257		-
Commercial real estate - other		936,484		936,484		34,693		905,851		8,914
Commercial business		-		-		-		8,578		-
Consumer		-		-		-		-		-
	$	1,662,074	$	1,662,074	$	34,693	$	2,291,953	$	53,153

December 31, 2014
With no related allowance recorded:
Single and multifamily residential real estate	$	725,090	$	725,090	$	-	$	604,851	$	44,239
Construction and development		-		-		-		332,954		-
Commercial real estate - other		190,791		190,791		-		229,385		-
Commercial business		-		-		-		-		-
Consumer		-		-		-		-		-
With related allowance recorded:
Single and multifamily residential real estate		-		-		-		442,094		-
Construction and development		-		-		-		649,560		-
Commercial real estate - other		1,099,712		1,099,712		88,712		645,833		42,321
Commercial business		-		-		-		17,156		-
Consumer		-		-		-		-		-
Total:
Single and multifamily residential real estate		725,090		725,090		-		1,046,945		44,239
Construction and development		-		-		-		982,514		-
Commercial real estate - other		1,290,503		1,290,503		88,712		875,218		42,321
Commercial business		-		-		-		17,156		-
Consumer		-		-		-		-		-
	$	2,015,593	$	2,015,593	$	88,712	$	2,921,833	$	86,560

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

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

At March 31, 2015 and December 31, 2014, the principal balance of TDRs was approximately zero and $343,000, respectively. As of March 31, 2015, the principal balance of TDRs was zero as the loan had been transferred to other real estate owned. During the three months ended March 31, 2014, the loans previously classified as loans 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 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 three months ended March 31, 2015.

Provision and Allowance for Loan Losses

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

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

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

The following table summarizes activity related to our allowance for loan losses for the three months ended March 31, 2015 and 2014, by portfolio segment.

	Single and
	multifamily		Construction			Commercial
	residential		and			real estate -			Commercial
	real estate		development			other			business		Consumer		Total
March 31, 2015
Allowance for loan losses:
Balance, beginning of period	$	160,797	$	234,130		$	363,097		$	184,679	$	90,073	$	1,032,776
Provision (reversal of provision) for
loan losses		-		(20,000	)		(10,000	)		30,000		-		-
Loan charge-offs		-		-			(43,267	)		-		-		(43,267	)
Loan recoveries		-		-			-			-		-		-
Net loans charged-off		-		-			(43,267	)		-		-		(43,267	)
Balance, end of period	$	160,797	$	214,130		$	309,830		$	214,679	$	90,073	$	989,509

Individually reviewed for impairment	$	-	$	-		$	34,693		$	-	$	-	$	34,693
Collectively reviewed for impairment		160,797		214,130			275,137			214,679		90,073		954,816
Total allowance for loan losses	$	160,797	$	214,130		$	309,830		$	214,679	$	90,073	$	989,509

Gross loans, end of period:
Individually reviewed for impairment	$	725,590	$	-		$	936,484		$	-	$	-	$	1,662,074
Collectively reviewed for impairment		16,307,579		8,624,278			23,749,815			16,486,540		1,288,995		66,457,207
Total loans (gross of deferred fees)	$	17,033,169	$	8,624,278		$	24,686,299		$	16,486,540	$	1,288,995	$	68,119,281

March 31, 2014
Allowance for loan losses:
Balance, beginning of year	$	268,757	$	710,010		$	206,176		$	26,870	$	90,073	$	1,301,886
Provision for loan losses		-		-			-			-		-		-
Loan charge-offs		-		-			(4,277	)		-		-		(4,277	)
Loan recoveries		3,427		-			-			-		-		3,427
Net loans charged-off		3,427		-			(4,277	)		-		-		(850	)
Balance, end of period	$	272,184	$	710,010		$	201,899		$	26,870	$	90,073	$	1,301,036

Individually reviewed for impairment	$	31,347	$	119,564		$	92,587		$	-	$	-	$	243,498
Collectively reviewed for impairment		240,837		590,446			109,312			26,870		90,073		1,057,538
Total allowance for loan losses	$	272,184	$	710,010		$	201,899		$	26,870	$	90,073	$	1,301,036

Gross loans, end of period:
Individually reviewed for impairment	$	1,197,018	$	1,008,253		$	544,521		$	-	$	-	$	2,749,792
Collectively reviewed for impairment		17,688,505		9,249,438			22,641,049			12,576,287		1,056,363		63,211,642
Total loans (gross of deferred fees)	$	18,885,523	$	10,257,691		$	23,185,570		$	12,576,287	$	1,056,363	$	65,961,434

	March 31, 2015			March 31, 2014
Nonaccrual loans	$	190,790		$	1,930,472
Average gross loans		68,362,619			66,238,145
Net loans charged-off as a percentage
of average gross loans		.00	%		.00	%
Allowance for loan losses as a
percentage of total gross loans		1.45	%		1.97	%
Allowance for loan losses as a
percentage of non-accrual loans		518.6	%		67.39	%

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 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 increased from 1.36% at December 31, 2014 to 1.40% at March 31, 2015. While management utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

			After one but
	One year or		within five		After five
	less		years		years		Total
March 31, 2015
Single and multifamily residential real estate	$	3,646,034	$	8,096,202	$	5,290,933	$	17,033,169
Construction and development		2,049,786		6,182,476		392,016		8,624,278
Commercial real estate - other		6,374,622		17,463,446		848,231		24,686,299
Commercial business		5,050,127		10,459,667		976,746		16,486,540
Consumer		768,145		498,805		22,045		1,288,995
Total	$	17,888,714	$	42,700,596	$	7,529,971	$	68,119,281

			After one but
	One year or		within five		After five
	less		years		years		Total
December 31, 2014
Single and multifamily residential real estate	$	5,290,321	$	8,197,828	$	4,585,280	$	18,073,429
Construction and development		2,257,649		5,599,646		568,158		8,425,453
Commercial real estate - other		4,085,577		20,504,283		656,536		25,246,396
Commercial business		5,767,504		9,521,755		769,823		16,059,082
Consumer		801,306		555,693		15,907		1,372,906
Total	$	18,202,357	$	44,379,205	$	6,595,704	$	69,177,266

Loans maturing after one year with:	March 31, 2015		December 31, 2014
Fixed interest rates	$	19,125,494	$	20,047,083
Floating interest rates	$	31,105,073	$	30,927,826

NOTE 6 – FAIR VALUE

Assets and Liabilities Measured at Fair Value

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

Available-for-sale investment securities ($15,201,271 and $15,615,526 at March 31, 2015 and December 31, 2014, 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 March 31, 2015, 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 March 31, 2015 and December 31, 2014 was $1.6 million and $1.9 million, respectively.

Other real estate owned and repossessed assets, generally consisting of properties or other collateral obtained through foreclosure or in satisfaction of loans, are carried at the lower or market value and measured on a non-recurring basis. Market values are generally obtained using independent appraisals which are generally prepared using the income or market valuation approach, adjusted for estimated selling costs which the Company considers to be Level 3 inputs. The carrying amount of other real estate owned and repossessed assets carried at fair value at March 31, 2015 and December 31, 2014 was $2,357,100 and $2,557,457, 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 March 31, 2015, the significant observable inputs used in the fair value measurements were as follows:

	Fair Value at		Significant
Description	March 31, 2015	Valuation Technique	Unobservable Inputs
Other real estate owned and repossessed assets	$2,357,100	Appraised value	Discounts to reflect current market conditions, abbreviated holding period, and estimated costs to sell
Impaired loans	$1,627,381	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, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value at		Significant
Description	December 31, 2014	Valuation Technique	Unobservable Inputs
Other real estate owned and repossessed assets	$2,557,457	Appraised value	Discounts to reflect current market conditions and estimated costs to sell
Impaired loans	$1,926,881	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, equipment and software, and other assets and liabilities.

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 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 March 31, 2015 and December 31, 2014 are as follows:

March 31, 2015	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	5,790,259	$	5,790,259	$	5,790,259	$	-	$	-
Federal funds sold		4,124,000		4,124,000		4,124,000		-		-
Investment securities
available for sale		15,201,271		15,201,271		-		15,201,271		-
Non-marketable equity
securities		384,250		384,250		-		384,250		-
Loans, net		66,980,651		66,912,681		-		-		66,912,681

Financial Liabilities:
Note payable		149,774		150,201		-		150,201		-
Accounts payable and accrued
expenses		2,800,850		2,800,850		-		2,800,850		-
Deposits		85,779,495		84,480,760		-		84,480,760		-
Securities sold under
agreements to repurchase		42,272		42,272		-		42,272		-

	Carrying
December 31, 2014	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	5,261,080	$	5,261,080	$	5,261,080	$	-	$	-
Federal funds sold		5,643,000		5,643,000		5,643,000		-		-
Investment securities
available for sale		15,615,526		15,615,526		-		15,615,526		-
Non-marketable equity
securities		609,650		609,650		-		609,650		-
Loans, net		67,994,667		67,925,640		-		-		67,925,640

Financial Liabilities:
FHLB advance		5,000,000		5,000,347		-		5,000,347		-
Note payable		600,000		603,567		-		603,567		-
Deposits		82,874,663		81,928,307		-		81,928,307		-
Securities sold under
agreements to repurchase		153,603		153,603		-		153,603		-

NOTE 7 – STOCK COMPENSATION PLANS

On July 26, 2005, the Company adopted the 2005 Stock Incentive Plan (“2005 Incentive Plan”) for the benefit of the directors, officers and employees. The 2005 Incentive Plan initially reserved up to 260,626 shares of the Company’s common stock for the issuance of stock options and contained evergreen provision, which provided that the maximum number of shares to be issued under the 2005 Incentive Plan would automatically increase each time the Company issues additional shares of common stock such that the total number of shares issuable under the 2005 Incentive Plan would at all times equal 12.5% of the then outstanding shares of common stock. Accordingly, 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 from 260,626 shares to 2,466,720 shares.

The board may grant up to 2,466,720 options at an option price per share not less than the fair market value on the date of grant. The options granted to officers and employees vest over a three year period from the date of grant, or the anniversary of the Bank’s opening for certain officers. The options expire 10 years from the grant date.

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 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 will be 2,466,720, and 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 at December 31, 2013. Of the 3,273,505 options issued, as of December 31, 2013, 1,168,505 options had 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 price of $1.11. In April 2014, 240,000 options granted to one former employee were forfeited. In December 2014, 86,250 options granted to three employees and to a third-party contractor were forfeited because the qualifying event date for vesting passed with no performance. As of December 31, 2014, 3,102,255 total options were outstanding at a weighted average price of $1.11. Of the 3,102,255 options issued, 2,186,005 options have vested. As of March 31, 2015, 3,102,255 total options were outstanding at a weighted average price of $1.11. Of the 3,102,255 options issued, 2,306,005 options have vested.

Compensation expense related to stock options granted was $80,817 and $128,688 for the three months ended March 31, 2015 and March 31, 2014, 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 months ended March 31, 2015 and 2014.

				Holding Company
				Transaction			Asset			Parent
	Community Banking			Services			Management			Only			Eliminations			Total
For the three months ended
March 31, 2015
Interest income	$	931,390		$	—		$	—		$	—		$	—		$	931,390
Interest expense		75,708						—			9,583			—			85,291
Net interest income (expense)		855,682			—			—			(9,583	)		—			846,099
Provision for loan losses		—			—			—			—			—			—
Noninterest income		109,561			33,327			—			1,318			—			144,206
Noninterest expense		983,184			276,432			(8,884	)		121,155			(23,021	)		1,348,866
Income (loss) before income taxes		(17,941	)		(243,105	)		8,884			(129,420	)		23,021			(358,561	)
Income taxes		5,080			—			—			—			—			5,080
Net income (loss)	$	(23,021	)	$	(243,105	)	$	8,884		$	(129,420	)	$	23,021		$	(363,641	)

	Community
	Banking		Holding Company (1)			Eliminations			Total
As of March 31, 2015
Cash and due from banks	$	5,785,561	$	20,683		$	(15,985	)	$	5,790,259
Federal funds sold		4,124,000		—			—			4,124,000
Investment securities		15,201,271		—			—			15,201,271
Loans receivable, net		66,980,651		—			—			66,980,651
Other real estate owned		1,603,000		754,100			—			2,357,100
Property and equipment, net		2,098,787		237,816			—			2,336,603
Other assets		760,549		423,214			—			1,183,763
Total assets	$	96,553,819	$	1,435,813		$	(15,985	)	$	97,973,647

Deposits	$	85,795,480	$	—		$	(15,985	)	$	85,779,495
Securities sold under agreements to
repurchase		42,272		—			—			42,272
Note payable		—		149,774			—			149,774
Accrued and other liabilities		118,627		2,691,613			—			2,810,240
Shareholders’ equity (deficit)		10,597,440		(1,405,574	)		—			9,191,866
Total liabilities and shareholders’ equity	$	96,553,819	$	1,435,813		$	(15,985	)	$	97,973,647

(1) Excludes investment in wholly-owned Bank subsidiary

			Holding Company
			Transaction			Asset			Parent
	Community Banking		Services			Management			Only			Eliminations			Total
For the three months ended
March 31, 2014
Interest income	$	980,388	$	—		$	(22,664	)	$	—		$	—		$	957,724
Interest expense		74,716		—			—			—			—			74,716
Net interest income (expense)		905,672		—			(22,664	)		—			—			883,008
Provision for loan losses		—		—			—			—			—			—
Noninterest income		100,589		—			118,452			44,084			(78,700	)		184,425
Noninterest expense		962,561		1,029,921			140,402			315,535			(35,000	)		2,413,419
Income (loss) before income taxes		43,700		(1,029,921	)		(44,614	)		(271,451	)		(43,700	)		(1,345,986	)
Income taxes		—		—			—			—			—			—
Net income (loss)	$	43,700	$	(1,029,921	)	$	(44,614	)	$	(271,451	)	$	(43,700	)	$	(1,345,986	)

	Community
	Banking		Holding Company (1)		Eliminations			Total
As of March 31, 2014
Cash and due from banks	$	3,527,125	$	1,894,723	$	(1,289,011	)	$	4,132,837
Federal funds sold		4,974,000		—		—			4,974,000
Investment securities		20,056,419		—		—			20,056,419
Loans receivable, net		63,742,708		808,189		—			64,550,897
Other real estate owned		1,296,000		1,053,010		—			2,349,010
Property and equipment, net		2,114,641		359,409		—			2,474,050
Other assets		765,106		234,307		—			999,413
Total assets	$	96,475,999	$	4,349,638	$	(1,289,011	)	$	99,536,626

Deposits	$	86,851,842	$	—	$	(1,289,011	)	$	85,562,831
Securities sold under agreements to
repurchase		37,017		—		—			37,017
Accrued and other liabilities		118,567		399,549		—			518,116
Shareholders’ equity		9,468,573		3,950,089		—			13,418,662
Total liabilities and shareholders’
equity	$	96,475,999	$	4,349,638	$	(1,289,011	)	$	99,536,626

(1) Excludes investment in wholly-owned Bank subsidiary

The sole activity conducted within our Asset Management business segment is the resolution of assets acquired from the Bank including, but not limited to, those certain classified assets totaling approximately $5.5 million purchased by the Company in the second quarter of 2013 from the Bank.

The activities conducted within our Transaction Services business segment relate to the Company’s research and development efforts to enhance existing and develop new digital banking, payments and transaction services. The Company incurred approximately $276,000 and $1.0 million in research and development expenses during the quarters ended March 31, 2015 and 2014, respectively. The Company recognized $33,327 in noninterest income within the Transaction Services business segment during the quarter ended March 31, 2015 relating to revenue received under a contract with an independent third party to develop a proprietary mobile peer-to-peer payment service offering. No such noninterest income amounts were recognized during the quarter ended March 31, 2014.

NOTE 9 — NOTE PAYABLE

In September 2014, the Company closed a $600,000 one-year borrowing. The loan was provided by a board member of the Bank and as a result needed to comply with Regulation O. Proceeds of the loan were used primarily to fund the research and development effort in the Transaction Services business segment. The loan is collateralized by a first perfected security interest in certain real estate assets of the Company. The loan was fully drawn at closing, and carries an annual interest rate of 7% per annum for the first six months on any outstanding borrowings and then steps up to 8% per annum for the remaining 6 months of the term. On March 18, 2015, one of the parcels of real estate was sold and a payment was made on the loan so that the outstanding balance of the loan was $149,774, which was equal to the balance on March 31, 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 were secured by $13.9 million in collateralized loans. The terms of this note required monthly interest payments through the January 2015 maturity date, at which time the advance was repaid in its entirety. No FHLB advances were outstanding as of March 31, 2015.

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;

●	risks and uncertainties related to potentially listing our shares on a national securities exchange;

●	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;

●	risks and uncertainties related to capital expenditures and our estimates regarding our capital expenditures;

●	risks and uncertainties related to our liquidity, working capital requirements and access to funding;

●	increased cybersecurity risks, potential business disruptions or financial losses and changes in technology;

●	risks and uncertainties related to our ability to comply with regulations;

●	risks and uncertainties related to changes in economic conditions;

●	risks and uncertainties related to credit losses;

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

●	risks and uncertainties related to allowances for loan losses and loan loss provisions;

●	the lack of loan growth in recent years;

●	our ability to attract and retain key personnel;

●	our ability to protect, use, develop, market and otherwise exploit our proprietary technology and intellectual property;

●	risks and uncertainties related to our ability to retain our existing customers;

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

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

●	changes in the interest rate environment, business conditions, inflation and changes in monetary and tax policies;

●	changes in political, legislative or regulatory conditions;

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

●	changes in deposit flows;

●	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, 2014, as filed in our 2014 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 allowable costs as incurred until such point that the product is available for general release to customers.

Overview

The following discussion describes our results of operations for the three month periods ended March 31, 2015 and 2014 and also analyzes our financial condition as of March 31, 2015.

The Consolidated Company

At March 31, 2015, we had total assets of $97.9 million, a decrease of $2.9 million, or 2.8%, from total assets of $100.7 million at December 31, 2014. 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 $67.0 million, $15.2 million, $2.4 million, $4.1 million and $5.8 million, respectively, at March 31, 2015. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $68.0 million, $15.6 million, $2.6 million, $5.6 million and $5.3 million, respectively, at December 31, 2014.

Our liabilities and shareholders’ equity at March 31, 2015, totaled $88.8 million and $9.2 million, respectively, compared to liabilities of $91.3 million and shareholders’ equity of $9.4 million at December 31, 2014. The principal component of our liabilities is deposits, which were $85.8 million and $82.9 million at March 31, 2015 and December 31, 2014, respectively.

Our net loss was $363,641 for the three months ended March 31, 2015, or $0.02 per share, a decrease of $752,345, or 55.9%, compared to a net loss of $1.3 million, or $0.07 per share, for the three months ended March 31, 2014. This decrease in net loss was primarily driven by decreases in product research and development expenses. The Company’s liquidity constraints during the three months ended March 31, 2015 resulted in a moderate decrease in such research and development efforts.

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 March 31, 2015, we had total assets at the Bank of $96.6 million compared to $98.8 million at December 31, 2014. 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 $67.0 million, $15.2 million, $1.6 million, $4.1 million and $5.8 million, respectively, at March 31, 2015. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $68.0 million, $15.6 million, $1.4 million, $5.6 million and $5.1 million, respectively, at December 31, 2014. At March 31, 2015, we had total liabilities at the Bank of approximately $86.0 million compared to approximately $88.3 million at December 31, 2014. The largest components of total liabilities at the Bank are deposits, which were $85.8 million and $83.0 million at March 31, 2015 and December 31, 2014, respectively.

The Company

The Company’s cash balances, independent of the Bank, were approximately $21,000 and its real estate held for sale was approximately $754,000 at March 31, 2014 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The decrease in liquid assets of approximately $267,000 is due primarily to expenses incurred related to the transaction services segment. In addition, at March 31, 2015 the Company has payables due to unsecured vendors of $2.7 million and a note payable to a related party of $149,664 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. Without raising additional capital, the Company will not be able to sustain its current rate of investment, operations and business. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and my not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

Transaction Services

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 (the “digital banking business”). In addition to the online bill pay, person-to-person payments, ACH services, debit and credit cards, and merchant services, we now also offer mobile bill pay and person-to-person payments as well as mobile remote deposit capture. In conjunction with our efforts to purse these opportunities, we have begun offering services under the trade name “nD bancgroup” and, as described below, have taken steps to protect our intellectual property rights to that name.

In March 2014, we 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 developers and vendors to support its business operations; and has received approval from the Board of Governors of the Federal Reserve System (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 and payment 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.

The Company continues to implement its plans to support and expand the digital banking business, which plans may include equity and debt financings to, among other things, invest in technology and infrastructure related to the digital banking business, recruit additional employees and management, expand our compliance and regulatory functions, build reserves for regulatory capital and expand our operations and sales, marketing, and advertising efforts. We will seek input and consent from the OCC or the Federal Reserve that they do not object to a material expansion of any of the Company’s business activities. There can be no assurance that they will not object to such expansions or that the Company will be successful in implementing the steps necessary to expand our business.

We have made and plan to continue to make investments of capital in technology and infrastructure relating to our banking, transaction services and digital banking businesses. We expect to continue to develop and license software from third parties, expand our mobile application development capabilities, our mobile payment functionalities and our data integration and security services. We also expect to expand our relationships with and investments in our existing datacenter relationships as well as establish new relationships with national and international datacenter infrastructure providers. We may form additional subsidiaries to support these efforts. We anticipate expanding our marketing and sales efforts as well as expanding our treasury, funding, payment processing, risk management and internal compliance functions. We also anticipate the possibilities of expanding the activities and offices in South Carolina and New York. We will need to generate internal and external capital to continue making these investments and pursuing these objectives.

Results of Operations

Three months ended March 31, 2015 and 2014

We recorded a net loss of $363,641, or $0.02 per diluted share, for the quarter ended March 31, 2015, compared to a net loss of $1,345,986, or $0.07 per diluted share, for the quarter ended March 31, 2014. The decrease in net loss of $752,345 was primarily due to decreases in research and development in addition to compensation and benefits expense and in real estate owned activity. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the three months ended March 31, 2015 and 2014. 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 March 31,
	2015						2014
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Federal funds sold and other	$	7,442,233	$	9,288	0.51	%	$	11,477,919	$	8,891	0.31	%
Investment securities		15,432,993		94,638	2.49			20,148,222		135,697	2.73
Loans (1)		68,362,619		827,464	4.91			64,548,717		813,136	5.11
Total interest-earning assets	$	91,237,845	$	931,390	4.14	%	$	96,174,858	$	957,724	4.04	%

NOW accounts	$	7,452,192	$	2,246	0.12	%	$	6,721,548	$	3,111	0.19	%
Savings & money market		36,293,521		20,818	0.23			40,324,590		23,395	0.24
Time deposits (excluding brokered
time deposits)		28,583,320		51,893	0.74			27,582,509		42,154	0.62
Brokered time deposits		-		-	-			1,576,346		6,034	1.55
Total interest-bearing deposits		72,329,033		74,957	0.42			76,204,993		74,694	0.40
Borrowings		1,657,330		10,335	2.53			76,726		22	0.12
Total interest-bearing liabilities	$	73,986,363	$	85,292	0.47	%	$	76,281,719	$	74,716	0.40	%

Net interest spread					3.67	%					3.64	%
Net interest income/margin			$	846,098	3.76	%			$	883,008	3.72	%

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

For the three months ended March 31, 2015, we recognized $931,390 in interest income and $85,292 in interest expense, resulting in net interest income of $846,098, a decrease of $36,910, or 4.2%, over the same period in 2014. Average earning assets decreased to $91.2 million for the three months ended March 31, 2015 from $96.2 million for the three months ended March 31, 2014, a decrease of $4.9 million, or 5.1%. This decrease in earning assets was primarily due to a $4.0 million decrease in federal funds sold and a $4.7 million decrease in investment securities partially offset by an increase of $3.8 million in average loans. Average interest bearing liabilities decreased to $74.0 million for the three months ended March 31, 2015 from $76.3 million for the three months ended March 31, 2014, a decrease of $2.3 million, or 3.0%. Net interest margin, calculated as annualized net interest income divided by average earning assets, increased from 3.72% for the quarter ended March 31, 2014 to 3.76% for the quarter ended March 31, 2015, primarily due to an increase in yield on earning assets from 4.04% to 4.14% between periods, partially offset by an increase in cost of funds from 0.40% to 0.37% between periods due to the mix of liabilities and the timing of their repricing.

We did not recognize any provision for loan losses for the quarters ended March 31, 2015 and 2014. The allowance as a percentage of gross loans decreased from 1.97% as of March 31, 2014 to 1.45% as of March 31, 2015. Specific reserves were $34,693 on impaired loans of $1.7 million as of March 31, 2015 compared to specific reserves of $88,712 on impaired loans of $2.0 million as of December 31, 2014 and $243,498 on impaired loans of $2.7 million as of March 31, 2014. As of March 31, 2015, the general reserve allocation was 1.44% of gross loans not impaired compared to 1.41% as of December 31, 2014.

For the three months ended March 31, 2015, noninterest income was $144,206 compared to $184,425 for the three months ended March 31, 2014, a decrease of $40,219, or 21.8%, between comparable periods. Noninterest income for the three months ended March 31, 2015 and 2014 was derived from service charges on deposits, customer service fees, mortgage origination income and other revenues recognized within the Transaction Services business segment. The largest contributor for this quarter’s decrease was the reduction in gain resulting from the sale of loans held for sale in the amount of $118,452, partially offset by an increase in gain on sale of investment securities of $41,148.

During the quarter ended March 31, 2015, we incurred noninterest expenses of $1.3 million, compared to noninterest expenses of $2.4 for the quarter ended March 31, 2014, a decrease of $1,064,553, or 44.1%. This decrease in noninterest expenses for the three month period ended March 31, 2015 primarily resulted from a decrease in research and development expense of $833,989 and decreases in compensation and benefits of $42,119 and other real estate owned activity of $91,559. Compensation and benefits decreased $42,119, or 6.1% due to a decrease in stock options granted and expense recognized of $46,210.

We recognized $5,080 in income tax expense for the three month period ended March 31, 2015 due to our net operating income in 2014 at the Bank. We did not recognize any income tax benefit or expense for the three month period ended March 31, 2014 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 weighing all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

Assets and Liabilities

General

Total assets as of March 31, 2015 and December 31, 2014 were $98.0 million and $100.7 million, respectively, a decrease of $2.7 million. Loans, net of allowance decreased $1.0 million due to loan repayments and transfers to other real estate owned during the quarter. Other real estate owned decreased $200,357 due to the sale of one property during the three months ended March 31, 2015. Investment securities available for sale decreased $414,255 as a result of $804,077 in maturities and paydowns and $48,462 in amortization, partially offset by $300,000 in purchases and a $97,136 change in unrealized gains. Cash and cash equivalents increased $529,179 and federal funds sold decreased $1.5 million. At March 31, 2015, our total assets consisted principally of $5.8 million in cash and due from banks, $4.1 million in fed funds sold, $15.2 million in investment securities, $67.0 million in net loans, $2.3 million in property and equipment and $2.4 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 March 31, 2015 totaled $88.8 million, representing a decrease of approximately $2.5 million compared to December 31, 2014, and consisted principally of $85.8 million in deposits, $149,774 in a note payable and $2.8 in accounts payable and accrued expenses. At March 31, 2015, shareholders’ equity was $9.2 million compared to $9.4 million at December 31, 2014. Shareholders’ equity decreased due to the recognition of net loss of $363,641, and stock option expense of $80,817, as well as an increase of $64,110 in unrealized gains on investment securities available for sale.

Loans

Since loans typically provide higher interest yields than other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio. At March 31, 2015, our gross loan portfolio consisted primarily of $33.3 million of commercial real estate loans, $16.5 million of commercial business loans, and $18.3 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2014 Form 10-K. We experienced net repayments of $714,016 during the three months ended March 31, 2015 as a result of payoffs and repayments exceeding originations, while continuing to carefully consider liquidity needs and credit risk management.

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

	March 31,
	2015			% of Total
Real estate:
Commercial	$	24,686,299		36.3	%
Construction and development		8,624,278		12.7
Single and multifamily residential		17,033,169		25.1
Total real estate loans		50,343,746		74.1
Commercial business		16,486,540		24.2
Consumer		1,288,995		1.9
Deferred origination fees, net		(149,121	)	(0.2	)
Gross loans, net of deferred fees		67,970,160		100.0	%
Less allowance for loan losses		(989,509	)
Loans, net	$	66,980,651

	December 31,
	2014			% of Total
Real estate:
Commercial	$	25,246,396		36.6	%
Construction and development		8,425,453		12.2
Single and multifamily residential		18,073,429		26.2
Total real estate loans		51,745,278		75.0
Commercial business		16,059,082		23.2
Consumer		1,372,906		2.0
Deferred origination fees, net		(149,823	)	(0.2	)
Gross loans, net of deferred fees		69,027,443		100.0	%
Less allowance for loan losses		(1,032,776	)
Loans, net	$	67,994,667

The largest component of our loan portfolio at March 31, 2015 was $24.7 million of commercial real-estate loans, which represented 36.3% of the portfolio. The remainder of our loan portfolio consisted primarily of $17.0 million of single and multifamily residential loans, $8.6 million of construction and development loans, and $16.4 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 March 31, 2015 and December 31, 2014. Total delinquent and nonaccrual loans increased from $794,718 at December 31, 2014 to $1.4 million at March 31, 2015, an increase of $613,321, or 77%. This increase was a result of movement in several categories. Nonaccrual loans decreased during the three months due to the transfer of one loan during March 2015. At March 31 2015, nonaccrual loans represented 0.2% of gross loans compared to 0.7% of gross loans as of December 31, 2014. Loans past due 30-89 days are considered potential problem loans and amounted to $1.2 million at March 31, 2015 compared to $260,661 at December 31, 2014.

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 March 31, 2015 and December 31, 2014.

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 March 31, 2015, we had loans totaling $2.3 million on the watch list compared to $730,565 as of December 31, 2014, an increase of $1.6 million or 116%. This increase in watch list loans was due to three loans being downgraded during the quarter.

Loans graded six or greater are considered classified credits. At March 31, 2015 and December 31, 2014, classified loans totaled $2.5 million and $2.7 million, respectively. The decrease in this category of $190,543, or 7.1%, during the three months ended March 31, 2015 is primarily due to one loan moving to other real estate owned for $300,000 which included a charge off of approximately $46,000 as well as $152,723 in loan paydowns. Classified credits are evaluated for impairment on a quarterly basis.

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

At March 31, 2015, impaired loans totaled $1.7 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 March 31, 2015, we had three loans totaling $508,580 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 March 31, 2015 and December 31, 2014.

At March 31, 2015 and December 31, 2014, the principal balance of TDRs was approximately zero and $343,000, respectively. During this period, the principal balance of TDRs decreased to zero because the loan constituting our sole TDR was transferred to other real estate owned. During the three months ended March 31, 2014, the two loans previously classified as loans 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 was recognized as a result of this sale.

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 March 31, 2015, the allowance for loan losses was $989,509, or 1.45% of gross loans, compared to $1.0 million at December 31, 2014, or 1.49% of gross loans. The allowance for loan loss decreased slightly due to one charge-off for approximately $46,000 which was recognized during the quarter.

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

Our allowance for loan losses consists of both specific and general reserve components. The specific reserve component relates to loans that are impaired loans as defined in FASB ASC Topic 310, “Receivables”. Loans determined to be impaired are excluded from the general reserve calculation described below and evaluated individually for impairment. Impaired loans totaled $1.7 million at March 31, 2015, with an associated specific reserve of $34,693. 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 March 31, 2015 and 2014, by portfolio segment. As of March 31, 2015, the allowance for loan losses was $989,509, or 1.45% of gross loans, compared to $1.0 million, or 1.49% of gross loans, as of December 31, 2014 and $1.3 million, or 1.97% of gross loans, as of March 31, 2014. We recognized zero provision for loan losses for the three months ended March 31, 2015 and 2014. Net charge-offs for the three months ended March 31, 2015 and 2014 were $43,267 and $850, respectively. Charge-offs thus far in 2015 relate to the write-down of collateral to fair value, against specific reserves, at the time of repossession. The charge-offs during the three months ended March 31, 2014 related to the charge-off of one unsecured consumer loans. Partial charge-offs were based on recent appraisals and evaluations on commercial real estate loans in the process of foreclosure. Loans with partial charge-offs are typically considered impaired loans and remain on nonaccrual status.

Other Real Estate Owned and Repossessed Assets

As of March 31, 2015 and December 31, 2014, we had $2.4 million and $2.6 million in other real estate owned, respectively. During the three months ended March 31, 2015, we completed the sale of one parcel of real estate. The sale of that parcel of real estate resulted in a gain of approximately $17,177 and is included in the loss below. The following table summarizes changes in other real estate owned and repossessed assets for the three months ended March 31, 2015 and 2014:

	2015			2014
Balance at beginning of period	$	2,557,457		$	2,508,170
Repossessed property acquired in settlement of loans		300,000			-
Proceeds from sales of repossessed property		(517,534	)		(93,704	)
Gain (loss) on sale and write-downs of repossessed property, net		17,177			(65,456	)
Balance at end of period	$	2,357,100		$	2,349,010

As of March 31, 2015, other real estate owned consisted of residential land lots valued at $114,100, commercial land valued at $1.0 million and commercial office space valued at $1.2 million. During 2014, other real estate owned for the Company increased due to the repossession of one property of $809,000, partially offset by the sale of real estate owned purchased from the Bank for proceeds of approximately $151,000, which resulted in losses of approximately $3,000 to the Company. In addition, the Company recognized write downs on real estate owned purchased from the Bank of approximately $579,000 during 2014. In February 2015, the Company entered into a contract to sell one piece of real estate which was used to secure the note payable. Write downs of approximately $191,000 related to the upcoming sale have been included in the 2014 write down amounts discussed above. On March 18, 2015, proceeds of $452,593 were received from the sale of one piece of real estate which was used as collateral on the note payable. The full amount of proceeds was applied towards the remaining balance due on the note. On March 5, 2015, one nonaccrual loan at the Bank for $343,266 was transferred to other real estate owned for $300,000, net of a specific reserve, which includes $34,327 in selling costs, of $43,266. The specific reserve was included in the December 31, 2014 allowance amounts. On March 20, 2015, proceeds of $62,306 were received from the sale of one piece of real estate held by the Bank. No gains or losses were recognized as a result of this transaction. In March 2015, the Bank entered into a contract to sell one piece of real estate which it closed in April 2015. Proceeds of approximately $65,000 were received and a loss of approximately $5,200 was recognized as a result of this sale.

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 March 31, 2015 we had $85.8 million in deposits, representing a decrease of $3.0 million compared to December 31, 2014. Deposits at March 31, 2015 consisted primarily of $20.0 million in demand deposit accounts, $35.4 million in money market accounts and $29.4 million in time deposits. As brokered deposits and advances have matured, we have not replaced these funds with wholesale funding as we have sought to reduce our reliance on brokered time deposits and other noncore funding sources. Our loan-to-deposit ratio was 78.1% and 82.0% at March 31, 2015 and December 31, 2014, respectively.

Borrowings

We use borrowings to fund growth of earning assets in excess of deposit growth. At March 31, 2015 and December 31, 2014, there were $42,272 and $153,603, respectively, in borrowings representing customer repurchase agreements.

Liquidity

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

The Company

The Company’s cash balances, independent of the Bank, were approximately $21,000 and its real estate held for sale (which serves as collateral for the Company’s note payable) was $754,100 at March 31, 2015 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The decrease in liquid assets of approximately $268,000 is due primarily to expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $2.7 million and a note payable to a related party of $149,774 (secured by the real estate held for sale by the Company) 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. Without raising additional capital, the Company will not be able to sustain its current rate of investment, operations and business. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and my not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

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 $12.9 million as of March 31, 2015.

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 2015. Comprehensive 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 25.6% at March 31, 2015 compared to 26.3% as of December 31, 2014. The decrease in liquidity is due primarily to the decrease in cash and due from bank and fed funds sold, primarily due to the repayment of the FHLB advance. See “Note 10 – Borrowings”, for additional information related to the FHLB advance.

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 March 31, 2015, we had issued commitments to extend credit of $7.4 million through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Capital Resources

Total shareholders’ equity decreased slightly from $9.4 million for December 31, 2014 to $9.1 million for March 31, 2015 due to a net loss of $363,641 and compensation expense related to stock options of $80,017 granted, partially offset by a $64,110 change in unrealized gain on investment securities available for sale. Without raising additional capital, the Company will not be able to sustain its current rate of investment, operations and business. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and my not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

Our Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies. 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 will interpret its new 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.

Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. The rule also includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier 1 capital.

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2015 and December 31, 2014.

					(Dollars in thousands)

									To be well capitalized
									under prompt
					For capital				corrective
					adequacy purposes				action provisions
	Actual				Minimum				Minimum
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2015
Total Capital (to risk
weighted assets)	$	11,461,000	15.4	%	$	5,937,000	8.0	%	$	7,421,000	10.0	%
Tier 1 Capital (to risk
weighted assets)		10,532,000	14.2			2,969,000	4.0			4,453,000	6.0
Tier 1 Capital (to
average assets)		10,532,000	11.1			3,780,000	4.0			4,725,000	5.0
Common Equity Tier
1 Capital (to risk
weighted assets)		10,532,000	14.2			2,969,000	4.5			4,453,000	4.5

As of December 31, 2014
Total Capital (to risk
weighted assets)	$	11,494,000	15.3	%	$	6,023,000	8.0	%	$	7,534,000	10.0	%
Tier 1 Capital (to risk
weighted assets)		10,551,000	14.0			3,014,000	4.0			4,521,000	6.0
Tier 1 Capital (to
average assets)		10,551,000	10.6			3,970,000	4.0			4,963,000	5.0
Common Equity Tier
1 Capital (to risk
weighted assets)		10,551,000	14.0			3,014,000	4.5			4,521,000	4.5

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 three months ended March 31, 2015, 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: May 13, 2015	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.

32		Section 1350 Certification.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at March 31, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.

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