Independence Bancshares, Inc. - FORM 10-Q

Attached files

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EX-32 - SECTION 1350 CERTIFICATION - Independence Bancshares, Inc.	indbanc3251541-ex32.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - Independence Bancshares, Inc.	indbanc3251541-ex312.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - Independence Bancshares, Inc.	indbanc3251541-ex311.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, 2017

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 ]
			Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,502,760 shares of common stock, par value $.01 per share, were issued and outstanding as of May 5, 2017.

Independence Bancshares, Inc.

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	March 31, 2017			December 31, 2016
	(unaudited)			(audited)
Assets
Cash and due from banks	$	5,125,556		$	4,631,727
Federal funds sold		4,964,000			6,143,000
Cash and cash equivalents		10,089,556			10,774,727
Interest bearing deposits in other institutions		8,750,000			10,500,000
Investment securities available for sale		2,501,270			2,499,805
Non-marketable equity securities		502,550			380,050
Loans, net of allowance for loan losses of $1,410,964 and
$1,338,149, respectively		61,409,117			59,144,847
Accrued interest receivable		185,887			170,342
Property, equipment, and software, net		2,032,472			2,025,774
Other real estate owned and repossessed assets		2,387,667			2,222,667
Bank-owned life insurance		2,564,147			2,542,910
Other assets		172,719			187,935
Total assets	$	90,595,385		$	90,449,057

Liabilities
Deposits:
Non-interest bearing	$	11,829,083		$	13,723,903
Interest bearing		64,727,685			65,983,745
Total deposits		76,556,768			79,707,648

Federal Home Loan Bank advances		4,000,000			-
Securities sold under agreements to repurchase		78,194			113,598
Accrued interest payable		11,246			8,802
Accounts payable and accrued expenses		650,171			674,644
Total liabilities		81,296,379			80,504,692

Commitments and contingencies

Shareholders’ equity
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; 8,425 Series A shares issued and outstanding		84			84
Common stock, par value $.01 per share; 300,000,000 shares
authorized; 20,502,760 shares issued and outstanding		205,028			205,028
Additional paid-in capital		43,053,599			43,053,599
Accumulated other comprehensive loss		(5,599	)		(8,056	)
Accumulated deficit		(33,954,106	)		(33,306,290	)
Total shareholders’ equity		9,299,006			9,944,365
Total liabilities and shareholders’ equity	$	90,595,385		$	90,449,057

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
	2017			2016
Interest income
Loans	$	805,885		$	830,213
Investment securities		6,734			68,198
Federal funds sold and other		38,143			16,641
Total interest income		850,762			915,052

Interest expense
Deposits		79,039			78,614
Borrowings		5,337			18
Total interest expense		84,376			78,632

Net interest income		766,386			836,420
Provision (reversal of provision) for loan losses		191,149			(68,000	)

Net interest income after provision for loan losses		575,237			904,420

Non-interest income
Service fees on deposit accounts		25,347			25,203
Residential loan origination fees		50,620			44,155
SBA loan fees		-			119,306
Other income		31,407			9,771
Total non-interest income		107,374			198,435

Non-interest expenses
Compensation and benefits		632,405			660,107
Real estate owned activity		45,566			9,096
Occupancy and equipment		132,068			154,874
Insurance		60,216			57,974
Data processing and related costs		113,816			87,872
Professional fees		196,394			227,688
Product research and development expense		-			100,482
Other		149,962			105,192
Total non-interest expenses		1,330,427			1,403,285

Loss before income tax expense		(647,816	)		(300,430	)

Income tax expense		-			-

Net loss	$	(647,816	)	$	(300,430	)

Other comprehensive income, net of tax
Unrealized gain on investment securities available for sale,		2,457			71,021
Reclassification adjustment included in net income,
net of tax		-			-
Other comprehensive income		2,457			71,021

Total comprehensive loss	$	(645,359	)	$	(229,409	)
Net loss per common share – basic and diluted	$	(.03	)	$	(.01	)

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
	Preferred stock			Common stock			Additional		comprehensive			Accumulated
	Shares	Amount		Shares	Amount		paid-in capital		income (loss)			deficit			Total
December 31, 2015	8,425	$	84	20,502,760	$	205,028	$	43,043,473	$	113,846		$	(30,718,272	)	$	12,644,159
Compensation expense related to
stock options granted	-		-	-		-		5,064		-			-			5,064
Net loss	-		-	-		-		-		-			(300,430	)		(300,430	)

Other comprehensive income	-		-	-		-		-		71,021			-			71,021

March 31, 2016	8,425	$	84	20,502,760	$	205,028	$	43,048,537	$	184,867		$	(31,018,702	)	$	12,419,814

December 31, 2016	8,425	$	84	20,502,760	$	205,028	$	43,053,599	$	(8,056	)	$	(33,306,290	)	$	9,944,365
Net loss	-		-	-		-		-		-			(647,816	)		(647,816	)

Other comprehensive income	-		-	-		-		-		2,457			-			2,457
March 31, 2017	8,425	$	84	20,502,760	$	205,028	$	43,053,599	$	(5,599	)	$	(33,954,106	)	$	9,299,006

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,
	2017			2016
Operating activities
Net loss	$	(647,816	)	$	(300,430	)
Adjustments to reconcile net loss to cash used in operating activities
Provision (reversal of provision) for loan losses		191,149			(68,000	)
Depreciation		25,997			53,685
Amortization of investment securities discounts/premiums, net		992			39,357
Stock option expense related to stock options granted		-			5,064
Net changes in fair value and gains losses on other real estate owned and
repossessed assets		-			(4,680	)
Increase in value of bank owned life insurance		(21,237	)		-
(Increase) decrease in other assets, net		(329	)		101,782
Decrease in other liabilities, net		(22,029	)		(489,265	)
Net cash used in operating activities		(473,273	)		(662,487	)

Investing activities
Net (increase) decrease in loans		(2,620,419	)		2,379,348
Repayments of investment securities available for sale		-			168,586
Maturities (purchases) of interest bearing deposits in other institutions		1,750,000			(250,000	)
(Purchases) redemption of non-marketable equity securities, net		(122,500	)		12,450
Purchase of property, equipment and software		(32,695	)		(7,567	)
Proceeds from sale of other real estate owned and repossessed assets		-			36,000
Net cash (used in) provided by investing activities		(1,025,614	)		2,338,817

Financing activities
Decrease in deposits, net		(3,150,880	)		(3,598,335	)
Federal Home Loan Bank advance		4,000,000			-
Decrease in securities sold under agreements to repurchase		(35,404	)		(71,851	)
Net cash provided by (used in) financing activities		813,716			(3,670,186	)

Net decrease in cash and cash equivalents		(685,171	)		(1,993,856	)

Cash and cash equivalents at beginning of the period		10,774,727			13,899,795

Cash and cash equivalents at end of the period	$	10,089,556		$	11,905,939

Supplemental information:
Cash paid for
Interest	$	81,932		$	77,290
Income taxes	$	-		$	-
Schedule of non-cash transactions
Unrealized gain on securities available for sale, net of tax	$	2,457		$	71,021
Loans transferred to other real estate owned and repossessed assets	$	165,000		$	233,767

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”), a national association organized under the laws of the United States. Since opening for business on May 16, 2005, the Bank has operated as a traditional community bank in Greenville, South Carolina, fulfilling the financial needs of individuals and small businesses in its market. The Bank provides traditional checking and savings products insured by the Federal Deposit Insurance Corporation (the “FDIC”) and consumer, commercial and mortgage loans, as well as ATM and online banking, cash management and safe deposit boxes.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and the Bank. In consolidation, all significant intercompany transactions have been eliminated. The accounting and reporting policies conform to accounting principles generally accepted in the United States and to general practices in the banking industry. All adjustments consist of normally recurring accruals that, in the opinion of management, are necessary for fair presentation of the consolidated financial position of the Company. The foregoing discussion is a summary only and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 10-K”) as filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2017 and Management’s Discussion and Analysis in this Quarterly Report on Form 10-Q. Operating results for the three month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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

Through December 31, 2016, the Company reported 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. As of March 31, 2017, the Company determined that segment reporting was no longer necessary based on the lack of activity in the Transaction Services and Asset Management segments. Substantially all of the Company’s consolidated activity for the three months ended March 31, 2017 was derived from community banking. Please refer to “Note 8 – Business Segments” for further information on the reporting for business segments.

Subsequent Events

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

NOTE 2 – LIQUIDITY AND CAPITAL CONSIDERATIONS

The Company

The Company’s cash balances, independent of the Bank, were approximately $1.8 million at March 31, 2017 compared to cash balances of approximately $1.8 million at December 31, 2016. Liquid assets decreased by $79,760, a slight decrease from December 31, 2016 as a result of professional fees and data processing expenses incurred by the Company. There were no expenses incurred related to the transaction services or asset management segments during the period ended March 31, 2017. See “Note 8 – Business Segments” for additional information related to the transaction services segment.

If the Company decides to pursue new business strategies or plans, the Company may not have sufficient working capital to bring the development to operational capability and would need to raise additional capital. The Company’s ability to raise additional capital will depend on a number of factors outside of its control, including conditions in the capital markets. There is a risk the Company would not be able to raise the capital it needs at all or upon favorable terms. If the Company cannot raise capital when needed, the Company would not be able to implement any such strategies or plans and the Company may be subject to increased regulatory supervision and restriction. Any restrictions imposed by regulators could have a material adverse effect on the Company’s financial condition and results of operations, whether directly or indirectly.

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 $10.1 million in cash and federal funds sold. If our cash needs at the Bank exceed that amount, 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 and investments in interest-bearing deposits. Our investments in interest bearing deposits at March 31, 2017 amounted to $8.8 million, or 9.7% of total assets. Our investment securities available for sale at March 31, 2017 amounted to $2.5 million, or 2.7% 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, 2017, $2.4 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 Federal Home Loan Bank of Atlanta (“FHLB”), from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At March 31, 2017, we had collateral that would support approximately $31.7 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 $13.1 million as of March 31, 2017.

The Bank has $5.5 in million federal funds purchased lines of credit through correspondent banks that are unsecured, but have 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 2017. 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 federal funds sold to total assets ratio which was 11.1% at March 31, 2017 compared to 11.9% as of December 31, 2016. The slight decrease in liquidity is due primarily to the decrease in cash and due from bank and federal funds sold as a result of the increase in loan balances.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For further information refer to the consolidated financial statements and footnotes thereto included in our 2016 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, 2017 and December 31, 2016, the Company had restricted cash totaling $2,000 with the FHLB. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Net Loss per Common Share - Basic loss per common share represents net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants and are determined using the treasury stock method. For the three month periods ended March 31, 2017 and March 31, 2016, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

Research and Development – All costs incurred to establish the technological feasibility of computer software to be sold, leased or otherwise marketed as research and development are expensed as incurred. Once technological feasibility has been established, the subsequent costs of producing, coding and testing the products should be capitalized. The expensing of computer software costs is discontinued when the product is available for general release for customers. The Company did not achieve technological feasibility in connection with the development its digital banking, payments and transaction services business and therefore expensed all computer software purchases and development expenses related to research and development. On September 25, 2015 the Company suspended the development of its digital banking business. During the year ended December 31, 2016 and 2015, we incurred product research and development expenses of approximately $250,000 and $2.2 million, respectively. The 2016 expenses related to remaining monthly contract costs which have since been completed, and no further research and development expenses have been incurred in 2017.

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

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

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

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

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

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

We did not recognize any income tax benefit or expense for the three month periods ended March 31, 2017 and 2016 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 that the Company will not recognize the entire deferred tax asset. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

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

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

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

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

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

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

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

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In October 2016, the FASB amended the Income Taxes topic of the Accounting Standards Codification to modify the accounting for intra-entity transfers of assets other than inventory. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

In February 2017, the FASB amended the Other Income Topic of the Accounting Standards Codification to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. 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, 2017
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
US treasury note	$	2,506,869	$	-	$	(5,599	)	$	2,501,270
Total investment securities	$	2,506,869	$	-	$	(5,599	)	$	2,501,270

	December 31, 2016
	Amortized		Gross Unrealized					Fair
	Cost		Gains		Losses			Value
US treasury note	$	2,507,861	$	-	$	(8,056	)	$	2,499,805
Total investment securities	$	2,507,861	$	-	$	(8,056	)	$	2,499,805

The following table presents information regarding securities with unrealized losses at March 31, 2017:

	Securities in an Unrealized				Securities in an Unrealized
	Loss Position for Less than				Loss Position for More than
	12 Months				12 Months					Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
US treasury note	$	2,501,270	$	5,599	$	-	$	-	$	2,501,270	$	5,599
Total temporarily impaired securities	$	2,501,270	$	5,599	$	-	$	-	$	2,501,270	$	5,599

The following table presents information regarding securities with unrealized losses at December 31, 2016:

	Securities in an Unrealized				Securities in an Unrealized
	Loss Position for Less than				Loss Position for More than
	12 Months				12 Months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
US treasury note	$	2,499,805	$	8,056	$	-	$	-	$	2,499,805	$	8,056
Total temporarily impaired securities	$	2,499,805	$	8,056	$	-	$	-	$	2,499,805	$	8,056

At March 31, 2017, our one investment security with a fair value of approximately $2.5 million and unrealized losses of $5,599 had been in a continuous loss position for less than twelve months. At March 31, 2017, there were no investment securities in a continuous loss position for more than twelve months. The Company believes, based on industry analyst reports and credit ratings that the deterioration in the fair value of this investment security available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, this loss is not considered other-than-temporary. The Company has the ability and intent to hold securities until such time as the values recover or the securities mature. At December 31, 2016, investment securities with a fair value of $2.5 million and unrealized losses of $8,056 had been in a continuous loss for less than twelve months. At December 31, 2016, there were no investment securities that had been in a continuous loss position for more than twelve months. All remaining investment securities were in an unrealized gain position.

The amortized costs and fair values of investment securities available for sale at March 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.

	March 31, 2017
	Amortized		Fair
	Cost		Value
Due within one year	$	—	$	—
Due after one through three years		2,506,869		2,501,270
Due after three through five years		—		—
Due after five through ten years		—		—
Due after ten years		—		—
Total investment securities	$	2,506,869	$	2,501,270

NOTE 5 – LOANS

At March 31, 2017, our gross loan portfolio consisted primarily of $28.0 million of commercial real estate loans, $15.9 million of commercial business loans, and $19.1 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 2016 Form 10-K, other than the increase in consumer loans resulting from the purchase of $4.8 million in unsecured consumer loans during the quarter ended March 31, 2017.

During the quarter ended March 31, 2017, one nonaccrual loan at the Bank was transferred to other real estate owned for $165,000. A specific reserve was included in the December 31, 2016 allowance accounts. During the quarter ended March 31, 2016, one nonaccrual loan was transferred to other real estate owned for $233,767. A specific reserve was included in the December 31, 2015 allowance accounts.

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, 2017 and December 31, 2016.

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
	real estate		development		other		business		Consumer		Total
March 31, 2017
30-59 days past due	$	397,469	$	-	$	-	$	117,204	$	-	$	514,673
60-89 days past due		-		-		-		34,712		-		34,712
Nonaccrual		99,794		-		-		735,730		-		835,524
Total past due and nonaccrual		497,263		-		-		887,646		-		1,384,909
Current		12,298,299		8,682,850		19,298,655		15,040,817		6,268,721		61,589,342
Total loans (gross of	$	12,795,562	$	8,682,850	$	19,298,655	$	15,928,463	$	6,268,721	$	62,974,251
deferred fees)
Deferred fees												(154,170	)
Loan loss reserve												(1,410,964	)
Total Loans, net											$	61,409,117

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
	real estate		development		other		business		Consumer		Total
December 31, 2016
30-59 days past due	$	442,295	$	-	$	-	$	617,052	$	-	$	1,059,347
60-89 days past due		-		-		-		409,675		-		409,675
Nonaccrual		108,951		-		195,500		-		-		304,451
Total past due and nonaccrual		551,246		-		195,500		-		-		1,773,473
Current		12,762,884		7,913,783		21,838,090		14,927,379		1,434,449		58,876,585
Total loans (gross of	$	13,314,130	$	7,913,783	$	22,033,590	$	15,954,106	$	1,434,449	$	60,650,058
deferred fees)
Deferred fees												(167,062	)
Loan loss reserve												(1,338,149	)
Total Loans, net											$	59,144,847

At March 31, 2017 and December 31, 2016, there were nonaccrual loans of $835,524 and $304,451, respectively. The increase in nonaccrual loans was a result of the movement of four loans to nonaccrual status, partially offset by one nonaccrual loan transferring to other real estate owned and one nonaccrual loan being fully charged off during the quarter. Foregone interest income related to nonaccrual loans equaled $25,200 and $35,011 for the three months ended March 31, 2017 and 2016, respectively. No interest income was recognized on nonaccrual loans during the three months ended March 31, 2017 and 2016. At March 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016.

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
March 31, 2017	real estate		development		other		business		Consumer		Total
Pass Loans	$	7,981,051	$	1,599,230	$	-	$	-	$	6,268,721	$	15,849,002
Grade 1 - Prime		-		-		-		-		-		-
Grade 2 - Good		-		-		-		-		-		-
Grade 3 - Acceptable		1,815,329		1,431,685		9,022,945		7,472,830		-		19,742,789
Grade 4 – Acceptable w/ Care		2,837,717		5,584,726		8,738,816		7,492,431		-		24,653,690
Grade 5 – Special Mention		-		67,209		760,708		-		-		827,917
Grade 6 - Substandard		161,465		-		776,186		963,202		-		1,900,853
Grade 7 - Doubtful		-		-		-		-		-		-
Total loans (gross of	$	12,795,562	$	8,682,850	$	19,298,655	$	15,928,463	$	6,268,721	$	62,974,251
deferred fees)

	Single and
	multifamily		Construction		Commercial
	residential		and		real estate -		Commercial
December 31, 2016	real estate		development		other		business		Consumer		Total
Pass Loans	$	8,246,567	$	1,462,925	$	-	$	-	$	1,434,449	$	11,143,941
Grade 1 - Prime		-		-		-		-		-		-
Grade 2 - Good		-		-		-		-		-		-
Grade 3 - Acceptable		1,919,685		1,108,334		11,057,550		7,676,592		-		21,762,161
Grade 4 – Acceptable w/ Care		2,877,013		5,273,411		9,232,019		7,307,961		-		24,690,404
Grade 5 – Special Mention		-		69,113		766,388		-		-		835,501
Grade 6 - Substandard		270,865		-		977,633		969,553		-		2,218,051
Grade 7 - Doubtful		-		-		-		-		-		-
Total loans (gross of	$	13,314,130	$	7,913,783	$	22,033,590	$	15,954,106	$	1,434,449	$	60,650,058
deferred fees)

Loans graded one through four are considered “pass” credits. At March 31, 2017, approximately 96% of the loan portfolio had a credit grade of “pass” compared to 95% at December 31, 2016. 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. As of March 31, 2017 and December 31, 2016, we had loans totaling $827,917 and $835,501, respectively, classified as special mention. This classification is utilized when an initial concern is identified about the financial health of a borrower. Loans are designated as such in order to be monitored more closely than other credits in the loan portfolio. At March 31, 2017, substandard loans totaled approximately $1.9 million, with all loans being collateralized by real estate, compared to $2.2 million at December 31, 2016. 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, 2017, impaired loans totaled $1.9 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 $317,198 from December 31, 2016 due to one loan being transferred to other real estate owned for $165,000, one loan for approximately $109,000 being charged off which was fully reserved at December 31, 2016, and approximately $13,000 in loan balance reductions through pay downs. 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, 2017, we had loans totaling approximately $828,000 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, 2017 and December 31, 2016.

	Unpaid						Average		Year to date
	principal		Recorded		Related		impaired		interest
	balance		investment		allowance		investment		income
March 31, 2017
With no related allowance recorded:
Single and multifamily residential real estate	$	99,794	$	99,794	$	-	$	139,515	$	-
Construction and development		-		-		-		54,830		-
Commercial real estate - other		776,186		776,186		-		747,387		10,053
Commercial business		227,472		227,472		-		161,878		-
With related allowance recorded:
Single and multifamily residential real estate		61,671		61,671		4,071		131,335		806
Construction and development		-		-		-		49,070		-
Commercial real estate - other		-		-		-		262,142		-
Commercial business		735,730		735,730		485,115		463,529		-
Consumer		-		-		-		-		-
Total:
Single and multifamily residential real estate		161,465		161,465		4,071		270,850		806
Construction and development		-		-		-		103,900		-
Commercial real estate - other		776,186		776,186		-		1,009,529		10,053
Commercial business		963,202		963,202		485,115		625,407		-
Consumer		-		-		-		-		-
	$	1,900,853	$	1,900,853	$	489,186	$	2,009,686	$	10,859

December 31, 2016
With no related allowance recorded:
Single and multifamily residential real estate	$	99,794	$	99,794	$	-	$	179,235	$	3,261
Construction and development		-		-		-		109,660		6,130
Commercial real estate - other		782,133		782,133		-		718,589		46,778
Commercial business		231,448		231,448		-		96,283		4,744
Consumer		-		-		-		-		-
With related allowance recorded:
Single and multifamily residential real estate		171,071		171,071		93,471		201,000		3,251
Construction and development		-		-		-		98,139		-
Commercial real estate - other		195,500		195,500		30,500		524,283		-
Commercial business		738,105		738,105		487,490		191,329		46,315
Consumer		-		-		-		-		-
Total:
Single and multifamily residential real estate		270,865		270,865		93,471		380,235		6,512
Construction and development		-		-		-		207,799		6,130
Commercial real estate - other		977,633		977,633		30,500		1,242,872		46,778
Commercial business		969,553		969,553		487,490		287,612		51,059
Consumer		-		-		-		-		-
	$	2,218,051	$	2,218,051	$	611,461	$	2,118,518	$	110,479

During the three months ended March 31, 2016, we had interest income on impaired loans of $11,492, which were related to commercial real estate and construction and development loans.

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

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; 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, 2017 and December 31, 2016, the principal balance of TDRs was zero. No TDRs went into default during the year ended December 31, 2016.

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, 2017.

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, 2017 and 2016, by portfolio segment.

	Single and
	multifamily			Construction			Commercial
	residential			and			real estate -			Commercial
	real estate			development			other			business			Consumer		Total
March 31, 2017
Allowance for loan losses:
Balance, beginning of period	$	235,797		$	73,630		$	330,785		$	684,679		$	13,258	$	1,338,149
Provision for loan losses		-			-			-			-			191,149		191,149
Loan charge-offs		(88,951	)		-			(30,500	)		-			-		(119,451	)
Loan recoveries		-			-			1,117			-			-		1,117
Net loans charged-off		(88,951	)		-			(29,383	)		-			-		(118,334	)
Balance, end of period	$	146,846		$	73,630		$	301,402		$	684,679		$	204,407	$	1,410,964

Individually reviewed for impairment	$	4,071		$	-		$	-		$	485,115		$	-	$	489,186
Collectively reviewed for impairment		142,775			73,630			301,402			199,564			204,407		921,778
Total allowance for loan losses	$	146,846		$	73,630		$	301,402		$	684,679		$	204,407	$	1,410,964

Gross loans, end of period:
Individually reviewed for impairment	$	161,465		$	-		$	776,186		$	963,202		$	-	$	1,900,853
Collectively reviewed for impairment		12,634,097			8,682,850			18,522,469			14,965,261			6,268,721		61,073,398
Total loans (gross of deferred fees)	$	12,795,562		$	8,682,850		$	19,298,655		$	15,928,463		$	6,268,721	$	62,974,251

March 31, 2016
Allowance for loan losses:
Balance, beginning of year	$	265,797		$	184,130		$	439,830		$	244,679		$	5,073	$	1,139,509
Provision (reversal of provision) for
loan losses		(30,000	)		(60,000	)		45,000			(28,000	)		5,000		(68,000	)
Loan charge-offs		-			-			-			-			-		-
Loan recoveries		-			-			-			-			1,312		1,312
Net loans charged-off		-			-			-			-			1,312		1,312
Balance, end of period	$	235,797		$	124,130		$	484,830		$	216,679		$	11,385	$	1,072,821

Individually reviewed for impairment	$	100,045		$	10,500		$	227,833		$	-		$	-	$	338,378
Collectively reviewed for impairment		135,752			113,630			256,997			216,679			11,385		734,443
Total allowance for loan losses	$	235,797		$	124,130		$	484,830		$	216,679		$	11,385	$	1,072,821

Gross loans, end of period:
Individually reviewed for impairment	$	141,645		$	178,954		$	1,858,217		$	-		$	-	$	2,178,816
Collectively reviewed for impairment		14,480,522			8,357,333			20,826,986			17,693,369			1,545,720		62,903,930
Total loans (gross of deferred fees)	$	14,622,167		$	8,536,287		$	22,685,203		$	17,693,369		$	1,545,720	$	65,082,746

	March 31, 2017			March 31, 2016
Nonaccrual loans	$	835,524		$	1,338,391
Average gross loans		62,985,466			65,898,821
Net loans charged-off as a percentage
of average gross loans		.19	%		.00	%
Allowance for loan losses as a
percentage of total gross loans		2.24	%		1.65	%
Allowance for loan losses as a
percentage of non-accrual loans		168.87	%		80.16	%

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. The general reserve as a percentage of loans collectively reviewed for impairment increased to 1.51% at March 31, 2017 from 1.22% at December 31, 2016. 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, 2017
Single and multifamily residential real estate	$	1,352,847	$	6,215,484	$	5,227,231	$	12,795,562
Construction and development		3,379,195		4,880,070		423,585		8,682,850
Commercial real estate - other		2,920,858		14,462,138		1,915,659		19,298,655
Commercial business		6,065,422		8,872,679		990,362		15,928,463
Consumer		503,794		5,725,896		39,031		6,268,721
Total	$	14,222,116	$	40,156,267	$	8,595,868	$	62,974,251

			After one but
	One year or		within five		After five
	less		years		years		Total
December 31, 2016
Single and multifamily residential real estate	$	1,445,328	$	6,710,484	$	5,158,318	$	13,314,130
Construction and development		2,987,321		4,829,172		97,290		7,913,783
Commercial real estate - other		3,144,814		16,958,206		1,930,570		22,033,590
Commercial business		6,203,428		8,736,000		1,014,678		15,954,106
Consumer		540,500		821,639		72,310		1,434,449
Total	$	14,321,391	$	38,055,501	$	8,273,166	$	60,650,058

Loans maturing after one year with:	March 31, 2017		December 31, 2016
Fixed interest rates	$	21,768,292	$	16,767,328
Floating interest rates	$	26,983,843	$	29,561,339

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 ($2,501,270 and $2,499,805 at March 31, 2017 and December 31, 2016, 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, 2017, 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, 2017 and December 31, 2016 was $1.4 million and $1.6 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, 2017 and December 31, 2016 was $2.4 million and $2.2 million, 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, 2017, the significant observable inputs used in the fair value measurements were as follows:

	Fair Value at			Significant
Description	March 31, 2017		Valuation Technique	Unobservable Inputs
Other real estate owned and repossessed assets	$	2,387,667	Appraised value	Discounts to reflect current market conditions, abbreviated holding period, and estimated costs to sell

Impaired loans	$	1,411,667	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, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value at			Significant
Description	December 31, 2016		Valuation Technique	Unobservable Inputs
Other real estate owned and repossessed assets	$	2,222,667	Appraised value	Discounts to reflect current market conditions and estimated costs to sell

Impaired loans	$	1,606,590	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, 2017 and December 31, 2016 are as follows:

March 31, 2017	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	5,125,556	$	5,125,556	$	5,125,556	$	-	$	-
Interest bearing deposits in
other institutions		8,750,000		8,750,000		-		8,750,000		-
Federal funds sold		4,964,000		4,964,000		4,964,000		-		-
Investment securities
available for sale		2,501,270		2,501,270		-		2,501,270		-
Non-marketable equity
securities		502,550		502,550		-		502,550		-
Loans, net		61,409,117		61,220,657		-		-		61,220,657
Bank owned life insurance		2,564,147		2,564,147		-		2,564,147		-

Financial Liabilities:
Federal Home Loan Bank
advances		4,000,000		4,002,223		-		-		4,002,223
Deposits		76,556,768		76,420,691		-		76,420,691		-
Securities sold under
agreements to repurchase		78,194		78,194		-		78,194		-

	Carrying
December 31, 2016	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	4,631,727	$	4,631,727	$	4,631,727	$	-	$	-
Interest bearing deposits in
other institutions		10,500,000		10,500,000		-		10,500,000		-
Federal funds sold		6,143,000		6,143,000		6,143,000		-		-
Investment securities
available for sale		2,499,805		2,499,805		-		2,499,805		-
Non-marketable equity
securities		380,050		380,050		-		380,050		-
Loans, net		59,144,847		59,084,364		-		-		59,084,364
Bank owned life insurance		2,542,910		2,542,910		-		2,542,910		-

Financial Liabilities:
Deposits		79,707,648		79,598,034		-		79,598,034		-
Securities sold under
agreements to repurchase		113,598		113,598		-		113,598		-

NOTE 7 – STOCK COMPENSATION PLANS

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

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

As of March 31, 2017 and December 31, 2016, 3,064,380 total options were outstanding at a weighted average price of $1.04. Of the 3,064,380 options outstanding, all options were vested.

Compensation expense related to stock options granted was $10,126 for the three months ended March 31, 2016. There was no compensation expense for the three months ended March 31, 2017 due the remaining stock options being fully vested in July 2016. 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

Through December 31, 2016, the Company reported 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. As of March 31, 2017, the Company determined that segment reporting was no longer necessary based on the lack of activity in the Transaction Services and Asset Management segments. Substantially all of the Company’s consolidated activity for the three months ended March 31, 2017 was derived from community banking.

As previously disclosed in the Form 10-Q filed May 6, 2016, our segment activity for the three months ended March 31, 2016 consisted of net income of $52,933 from the Community Banking segment, a loss of $100,482 at the Transaction Services segment resulting from product research and development expense, $5,510 of income at the Asset Management segment resulting from the sale of real estate owned, and a loss of $258,391 for the Parent Only segment. Also as previously reported, at March 31, 2016 the Holding Company had $600,000 in other real estate owned consisting of one commercial real estate property and had accrued expenses and other liabilities totaling $455,809.

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●	strategies for growth and sources of new operating revenues, including the Bank’s expansion of its consumer lending program to target prime and super-prime borrowers in its current market areas as well as throughout South Carolina;
●	suspension of business divisions or segments, including digital banking or consumer lending;
●	operating revenues, expenses, effective tax rates, and other results of operations;
●	current and future products and services and plans to develop and promote them;
●	capital expenditures and our estimates regarding our capital expenditures;
●	the lack of loan growth in recent years;
●	credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;
●	credit losses due to loan concentration;
●	the rate of delinquencies and amount of loans charged-off;
●	allowances for loan losses and loan loss provisions;
●	liquidity, working capital requirements and access to funding;
●	cybersecurity risks, business disruptions or financial losses and changes in technology;
●	our shareholder relations;
●	defense of litigation brought by current and/or former officers, directors and/or shareholders;
●	mergers and acquisition activity;
●	use of proceeds from sales of our securities;

●	our ability to comply with regulations;
●	relations with federal and state regulators;
●	listing our shares, including any listing on a national securities exchange;
●	changes in economic conditions;
●	our ability to attract and retain key personnel;
●	our ability to protect, use, develop, market and otherwise exploit our proprietary technology and intellectual property;
●	our ability to retain our existing customers;
●	increases in competitive pressure in the banking and financial services industries;
●	adverse changes in asset quality and resulting credit risk related losses and expenses;
●	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 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, 2016, as filed in our 2016 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 for customers. The Company did not achieve technological feasibility in connection with the development of its digital banking business, and therefore, expensed all computer software purchases and development expenses related to research and development. As previously noted, on September 25, 2015, the Company suspended the development of its digital banking business. No research and development costs have been incurred in the three months ended March 31, 2017.

Overview

The following discussion describes our results of operations for the three month periods ended March 31, 2017 and 2016 and also analyzes our financial condition as of March 31, 2017.

The Consolidated Company

At March 31, 2017, we had total assets of $90.6 million, a slight increase of $146,328 or 0.2%, from total assets of $90.5 million at December 31, 2016. The largest components of our total assets are net loans, interest-bearing deposits in other institutions, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $61.4 million, $8.8 million, $2.5 million, $2.4 million, $5.0 million and $5.1 million, respectively, at March 31, 2017. Comparatively, our net loans, investment securities available for sale, interest-bearing deposits in other institutions, other real estate owned, federal funds sold and cash and due from banks totaled $59.1 million, $2.5 million, $10.5 million, $2.2 million, $6.1 million and $4.6 million, respectively, at December 31, 2016.

Our liabilities and shareholders’ equity at March 31, 2017 totaled $81.3 million and $9.3 million, respectively, compared to liabilities of $80.5 million and shareholders’ equity of $9.9 million at December 31, 2016. The principal component of our liabilities is deposits, which were $76.6 million and $79.7 million at March 31, 2017 and December 31, 2016, respectively.

Our net loss was $647,816 for the three months ended March 31, 2017, or $0.03 per share, an increase in loss of $347,386, or 115.6%, compared to a net loss of $300,430, or $0.01 per share, for the three months ended March 31, 2016. This increase in net loss was primarily driven by the recognition of provision for loan losses, increases in activity related to real estate owned, a decrease in interest income on loans and no SBA loan fees recognized during the three months ended March 31, 2017.

The Company

The Company’s cash balances, independent of the Bank, were approximately $1.8 million at March 31, 2017 compared to cash balances of approximately $1.8 million at December 31, 2016. The slight decrease in liquid assets of approximately $80,000 is due primarily to the repayment of accrued liabilities for professional services during the quarter.

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, 2017, we had total assets at the Bank of $90.6 million compared to $90.4 million at December 31, 2016. The largest components of total assets at the Bank are net loans, interest bearing deposits in other institutions, bank-owned life insurance, investment securities available for sale, other real estate owned, federal funds sold, and cash and due from banks, which were $61.4 million, $8.8 million, $2.6 million, $2.5 million, $2.4 million, $5.0 million, and $5.1 million, respectively, at March 31, 2017. Comparatively, our net loans, interest bearing deposits in other institutions, bank-owned life insurance, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $59.1 million, $10.5 million, $2.5 million, $2.5 million, $2.2 million, $6.1 million and $4.6 million, respectively, at December 31, 2016. At March 31, 2017, we had total liabilities at the Bank of approximately $82.7 million compared to approximately $82.0 million at December 31, 2016. The largest components of total liabilities at the Bank are deposits, which were $78.3 million and $81.6 million at March 31, 2017 and December 31, 2016, respectively.

Transaction Services

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

Results of Operations

Three months ended March 31, 2017 and 2016

We recorded a net loss of $647,816, or $0.03 per diluted share, for the quarter ended March 31, 2017, compared to a net loss of $300,430, or $0.01 per diluted share, for the quarter ended March 31, 2016. The increase in net loss of $347,386 was primarily due to the recognition of provision for loan losses, increases in activity related to real estate owned, a decrease in interest income on loans and no SBA loan fees being recognized during the three months ended March 31, 2017. 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, 2017 and 2016. 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,
	2017						2016
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Federal funds sold and other	$	18,401,963	$	38,143	0.84	%	$	15,280,927	$	16,641	0.44	%
Investment securities		2,502,529		6,734	1.09			10,696,048		68,198	2.56
Loans (1)		62,958,466		805,885	5.19			65,898,821		830,213	5.05
Total interest-earning assets	$	83,862,958	$	850,762	4.11	%	$	91,875,796	$	915,052	3.99	%

NOW accounts	$	9,165,068	$	2,383	0.11	%	$	8,685,486	$	2,592	0.12	%
Savings & money market		29,401,320		19,680	0.27			34,127,626		20,854	0.25
Time deposits (excluding brokered
time deposits)		26,258,820		56,976	0.88			28,500,853		55,168	0.78
Total interest-bearing deposits		64,825,208		79,039	0.49			71,313,965		78,614	0.44
Borrowings		2,459,615		5,337	0.88			60,487		18	0.12
Total interest-bearing liabilities	$	67,284,823	$	84,376	0.51	%	$	71,374,452	$	78,632	0.44	%

Net interest spread					3.61	%					3.55	%
Net interest income/ margin			$	766,386	3.71	%			$	836,420	3.65	%

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

For the three months ended March 31, 2017, we recognized $850,762 in interest income and $84,376 in interest expense, resulting in net interest income of $766,386, a decrease of $70,034, or 8.4%, over the same period in 2016. Average earning assets decreased to $83.9 million for the three months ended March 31, 2017 from $91.9 million for the three months ended March 31, 2016, a decrease of $8.0 million, or 8.7%. This decrease in earning assets was primarily due to a $8.2 million decrease in average investment securities, as well as a decrease of $2.9 million in average loans, partially offset by an increase of $3.2 million in federal funds sold and cash and due from other banks. Average interest bearing liabilities decreased to $67.3 million for the three months ended March 31, 2017 from $71.4 million for the three months ended March 31, 2016, a decrease of $4.1 million, or 5.7%. Net interest margin, calculated as annualized net interest income divided by average earning assets, increased from 3.65% for the quarter ended March 31, 2016 to 3.71% for the quarter ended March 31, 2017, primarily due to an increase in yield on earning assets from 3.99% to 4.11% between periods, partially offset by an increase in cost of funds from 0.44% to 0.51% between periods due to the mix of liabilities and the timing of their repricing.

We recognized a provision for loan losses of $191,149 for the quarter ended March 31, 2017, primarily as a result of the $4.8 million in purchased unsecured consumer loans added during the period. We recognized a reversal of provision for loan losses of $68,000 for the quarter ended March 31, 2016. The allowance as a percentage of gross loans increased from 1.65% as of March 31, 2016 to 2.24% as of March 31, 2017. Specific reserves were $489,186 on impaired loans of $1.9 million as of March 31, 2017 compared to specific reserves of $611,461 on impaired loans of $2.2 million as of December 31, 2016 and $338,378 on impaired loans of $2.2 million as of March 31, 2016. As of March 31, 2017 and December 31, 2016, the general reserve allocation was 1.51% and 1.24%, respectively, of gross loans not impaired.

For the three months ended March 31, 2017, noninterest income was $107,374 compared to $198,435 for the three months ended March 31, 2016, a decrease of $91,061, or 45.9%, between comparable periods. Noninterest income for the three months ended March 31, 2017 and 2016 was derived from service charges on deposits, customer service fees, mortgage origination income. During the quarter ended March 31, 2016, noninterest income also included $119,306 in small business loan fees, but no similar fees were earned for the three months ended March 31, 2017.

During the quarter ended March 31, 2017, we incurred noninterest expenses of $1.3 million, compared to noninterest expenses of $1.4 million for the quarter ended March 31, 2016, a decrease of $72,858, or 5.2%. This decrease in noninterest expenses for the three month period ended March 31, 2017 primarily resulted from a decrease in product research and development expense of $100,482. Compensation and benefits decreased $27,702, or 4.2%, from March 31, 2016 due to no recognition of stock option expense and due to a decrease in the amount of incentive compensation accrued during the quarter ended March 31, 2017.

We did not recognize any income tax benefit or expense for the three month periods ended March 31, 2017 and 2016 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 that the Company will not recognize the entire deferred tax asset. 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, 2017 and December 31, 2016 were $90.6 million and $90.4 million, respectively, an increase of $146,328. Loans, net of allowance increased $2.3 million due to $8.6 million in loan originations during the quarter, which includes $4.8 million in purchased unsecured consumer loans, partially offset by loan repayments of $6.2 million and transfers to other real estate owned during the quarter. Other real estate owned increased $165,000 due to one loan transfer for $165,000 during the quarter. Investment securities available for sale increased $1,465 as a result of a $2,457 change in unrealized gains, partially offset by $992 in amortization. Interest-bearing deposits in other institutions decreased $1.8 million due to the maturities of time deposits during the quarter. Cash and due from banks increased $493,829 and federal funds sold decreased $1.2 million. At March 31, 2017, our total assets consisted principally of $5.1 million in cash and due from banks, $5.0 million in fed funds sold, $8.8 million in interest bearing deposits in other institutions, $2.5 million in investment securities, $61.4 million in net loans, $2.0 million in property and equipment, $2.6 million in bank-owned life insurance 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, 2017 totaled $81.3 million, representing an increase of approximately $791,687 compared to $80.5 million at December 31, 2016, and consisted principally of $76.6 million in deposits, $4.0 million in Federal Home Loan Bank advances and $650,171 in accounts payable and accrued expenses. At March 31, 2017, shareholders’ equity was $9.3 million compared to $9.9 million at December 31, 2016. Shareholders’ equity decreased in the 2017 period due to the recognition of a net loss of $647,816, partially offset by an increase of $2,457 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, 2017, our gross loan portfolio consisted primarily of $28.0 million of commercial real estate loans, $15.9 million of commercial business loans, $12.8 million of residential real estate and home equity loans and $6.3 million of consumer loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed, other than the increase in consumer loans resulting from the purchase of $4.8 million in unsecured consumer loans during the quarter ended March 31, 2017, in the footnotes to the consolidated financial statements included in our 2016 Form 10-K. We experienced net originations of $2.4 million during the three months ended March 31, 2017 as a result of advances of $3.8 million and purchased unsecured consumer loans of $4.8 million exceeding payoffs and repayments of $6.2 million. We continue to carefully consider liquidity needs and credit risk management.

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

	March 31,
	2017			% of Total
Real estate:
Commercial	$	19,298,655		30.7	%
Construction and development		8,682,850		13.8
Single and multifamily residential		12,795,562		20.4
Total real estate loans		40,777,067		64.9
Commercial business		15,928,463		25.4
Consumer		6,268,721		9.9
Deferred origination fees, net		(154,170	)	(0.2	)
Gross loans, net of deferred fees		62,820,081		100.0	%
Less allowance for loan losses		(1,410,964	)
Loans, net	$	61,409,117

	December 31,
	2016			% of Total
Real estate:
Commercial	$	22,033,590		36.4	%
Construction and development		7,913,783		13.1
Single and multifamily residential		13,314,130		22.0
Total real estate loans		43,261,503		71.5
Commercial business		15,954,106		26.4
Consumer		1,434,449		2.4
Deferred origination fees, net		(167,062	)	(0.3	)
Gross loans, net of deferred fees		60,482,996		100.0	%
Less allowance for loan losses		(1,338,149	)
Loans, net	$	59,144,847

The largest component of our loan portfolio at March 31, 2017 was $19.3 million of commercial real estate loans, which represented 30.7% of the portfolio. The remainder of our loan portfolio consisted primarily of $12.8 million of single and multifamily residential loans, $8.7 million of construction and development loans, $6.3 million in consumer loans, which include $4.8 million in purchased unsecured loans and $15.9 million of commercial business loans.

Loan Performance and Asset Quality

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

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, 2017 and December 31, 2016. Total delinquent and nonaccrual loans decreased from $1.8 million at December 31, 2016 to $1.4 million at March 31, 2017, a decrease of $388,564, or 21.9%. Nonaccrual loans increased during the three months due to the transfer of four loans during the three months ended March 31, 2017. At March 31 2017, nonaccrual loans represented 1.33% of gross loans compared to 0.05% of gross loans as of December 31, 2016. Loans past due 30-89 days are considered potential problem loans and amounted to $549,385 at March 31, 2017 compared to $1.5 million at December 31, 2016.

Another method used to monitor the loan portfolio is credit grading. As part of the loan review process, loans are given individual credit grades, representing the risk we believe is associated with the loan balance. Credit grades are assigned based on factors that impact the collectability of the loan, the strength of the borrower, the type of collateral, and loan performance. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. Refer to Note 5, Loans, for a table summarizing management’s internal credit risk grades, by portfolio class, as of March 31, 2017 and December 31, 2016.

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, 2017 and December 31, 2016, we had loans totaling $827,917 and $835,501, respectively, on the watch list. Watch list loans remained relatively constant as no new loans were downgraded during the quarter.

Loans graded six or greater are considered classified credits. At March 31, 2017 and December 31, 2016, classified loans totaled $1.9 million and $2.2 million, respectively. The decrease in this category of $317,198, or 14.3%, during the three months ended March 31, 2017 is primarily due to one loan moving to other real estate owned for $165,000 and one loan for approximately $109,000 being charged off which was fully reserved at December 31, 2016, and approximately $13,000 in loan paydowns. Classified credits are evaluated for impairment on a quarterly basis.

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

At March 31, 2017, impaired loans totaled $1.9 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, 2017, we had loans totaling approximately $828,000 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, 2017 and December 31, 2016.

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

At March 31, 2017 and December 31, 2016, the principal balance of TDRs was zero.

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, 2017, the allowance for loan losses was $1.4 million, or 2.24% of gross loans, compared to $1.3 million at December 31, 2016, or 2.21% of gross loans. The allowance for loan loss increased slightly due to the recognition of a provision for loan losses of $191,149 during the quarter, as well as due to a small recovery on loan loss of $1,117, partially offset by loan charge offs of $119,451.

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 $1.9 million at March 31, 2017, with an associated specific reserve of $489,186. 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.

We recognized a reversal of provision for loan losses of $68,000 for the three months ended March 31, 2016. We recognized a provision for loan losses for the three months ended March 31, 2017 of $191,149. Net charge-offs for the three months ended March 31, 2017 were $118,334. A net recovery of $1,312 was recognized for the three months ended March 31, 2016. The charge-offs during the three months ended March 31, 2017 related to the write-down of collateral to fair value, against specific reserves, at the time of repossession, as well as due to one unsecured loan being fully charged off during the quarter. The unsecured loan was fully reserved at December 31, 2016. 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, 2017 and December 31, 2016, we had $2.4 million and $2.2 million in other real estate owned, respectively. We did not complete any sales of real estate during the three months ended March 31, 2017. The following table summarizes changes in other real estate owned and repossessed assets for the three months ended March 31, 2017 and 2016:

	2017		2016
Balance at beginning of period	$	2,222,667	$	1,910,220
Repossessed property acquired in settlement of loans		165,000		233,767
Proceeds from sales of repossessed property		-		(36,000	)
Gain (loss) on sale and write-downs of repossessed property, net		-		4,680
Balance at end of period	$	2,387,667	$	2,112,667

As of March 31, 2017, other real estate owned consisted of commercial land valued at $909,000 and commercial office space valued at $1.5 million. In March 2017, one piece of real estate was moved to other real estate owned for $165,000. 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, 2017 we had $76.6 million in deposits, representing a decrease of $3.2 million compared to December 31, 2016. Deposits at March 31, 2017 consisted primarily of $11.8 million in demand deposit accounts, $37.5 million in money market accounts and $27.3 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 80.2% and 74.2% at March 31, 2017 and December 31, 2016, respectively.

Borrowings

We use borrowings to fund growth of earning assets in excess of deposit growth. Borrowings totaled $4.1 million at March 31, 2017 compared to $113,598 at December 31, 2016. FHLB advances accounted for $4.0 million of total borrowings as of March 31, 2017. These advances are secured with approximately $31.7 million of first and second mortgage loans and $251,400 of stock in the FHLB. The remaining balances at March 31, 2017 and December 31, 2016 were $78,194 and $113,598, 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 $1.8 million at March 31, 2017 compared to cash balances of approximately $1.8 million at December 31, 2016. Liquid assets decreased by $79,760, a slight decrease from December 31, 2016 as a result of professional fees and data processing expenses incurred at the Company. There were no expenses incurred related to the transaction services segment during the period ended March 31, 2017. See “Note 8 – Business Segments” for additional information related to the transaction services segment.

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 $10.1 million in cash and federal funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities and investments in interest bearing deposits. Our investments in interest-bearing deposits at March 31, 2017 amounted to $8.8 million, or 9.7% of total assets. Our investment securities available for sale at March 31, 2017 amounted to $2.5 million, or 2.8% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At March 31, 2017, $2.4 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 of Atlanta, 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, 2017, we had collateral that would support approximately $31.7 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 $13.1 million as of March 31, 2017.

The Bank has $5.5 million in federal funds purchased lines of credit through correspondent banks that are unsecured, but have not been utilized.

The Consolidated Company

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, 2017, we had issued commitments to extend credit of 1.4 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 from $9.9 million for December 31, 2016 to $9.3 million for March 31, 2017 due to a net loss of $647,816, partially offset by a $2,457 change in unrealized gain on investment securities available for sale. The foregoing discussion is a summary only and should be read in conjunction with the 2016 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q.

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

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

●	a new common equity Tier 1 risk-based capital ratio of 4.5%,
●	a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement),
●	a total risk-based capital ratio of 8% (unchanged from the former requirement), and
●	a leverage ratio of 4% (also unchanged from the former requirement).

Because the Company’s total assets were less than $1 billion at December 31, 2016, the Company is not subject to the new capital requirements established by the Basel III capital rules. However, bank holding companies with assets of less than $1 billion are subject to various restrictions on debt including requirements that debt be retired within 25 years of being incurred, that the debt to equity ratio is .30 to 1 within 12 years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity ratio exceeds 1 to 1.

Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock Tier 1 capital generally consists of instruments that previously qualified as Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital; except that the rule permits bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital (but not in Common Equity Tier 1 capital), subject to certain restrictions. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019 and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, we are required to hold a capital conservation buffer of 1.25%, increasing by 0.625% each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2017 and December 31, 2016. It is management’s belief that, as of March 31, 2017, the Bank met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were currently in effect.

(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, 2017
Total Capital (to risk
weighted assets)	$	8,759,000	12.2	%	$	5,761,000	8.0	%	$	7,202,000	10.0	%
Tier 1 Capital (to risk
weighted assets)		7,852,000	10.9			3,614,000	4.0			4,320,000	6.0
Tier 1 Capital (to
average assets)		7,852,000	8.7			2,881,000	4.0			4,518,000	5.0
Common Equity Tier
1 Capital (to risk
weighted assets)		7,852,000	10.9			3,241,000	4.5			3,241,000	4.5

As of December 31, 2016
Total Capital (to risk
weighted assets)	$	9,251,000	13.4	%	$	5,525,000	8.0	%	$	6,906,000	10.0	%
Tier 1 Capital (to risk
weighted assets)		8,382,000	12.1			2,762,000	4.0			4,144,000	6.0
Tier 1 Capital (to
average assets)		8,382,000	9.0			3,724,000	4.0			4,655,000	5.0
Common Equity Tier
1 Capital (to risk
weighted assets)		8,382,000	12.1			3,108,000	4.5			3,108,000	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 interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our interim Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

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 5, 2017	By:	/s/Lawrence R. Miller
	Lawrence R. Miller
	Interim Chief Executive Officer
	(Principal Executive Officer)


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

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, 2017, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at March 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, and (v) Notes to Consolidated Financial Statements.

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