10-Q 1 independence_10q.htm QUARTERLY REPORT

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 June 30, 2015

 

OR

 
     

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

 

For the Transition Period from _________to_________

Commission File No. 000-51907

Independence Bancshares, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,502,760 shares of common stock, $.01 par value per share, were issued and outstanding as of August 14, 2015.



Independence Bancshares, Inc.

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

June 30, 2015       December 31, 2014
(unaudited) (audited)
Assets
              Cash and due from banks $ 5,081,577 $ 5,261,080
              Federal funds sold 14,004,000 5,643,000
              Investment securities available for sale 14,587,793 15,615,526
              Non-marketable equity securities 405,600 609,650
              Loans, net of allowance for loan losses of $989,509 and $1,032,776,
                     respectively 65,011,086   67,994,667
              Accrued interest receivable 292,627 291,288
              Property and equipment, net 2,286,854 2,384,007
              Other real estate owned and repossessed assets 2,063,000 2,557,457
              Other assets   699,065 355,307
                            Total assets $ 104,431,602 $ 100,711,982
 
Liabilities
       Deposits:
              Noninterest bearing $ 11,919,316 $ 11,016,882
              Interest bearing 75,706,922 71,857,781
                     Total deposits 87,626,238 82,874,663
 
              Federal Home Loan Bank advances - 5,000,000
              Note payable 149,774 600,000
              Securities sold under agreements to repurchase 33,432 153,603
              Accrued interest payable 9,152 8,226
              Accounts payable and accrued expenses 1,257,513 2,664,910
                            Total liabilities 89,076,109 91,301,402
 
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 -
              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 42,931,339 35,124,151
              Accumulated other comprehensive income (loss) (140,297 ) 1,154
              Accumulated deficit (27,640,661 ) (25,919,753 )
                            Total shareholders’ equity 15,355,493 9,410,580
                            Total liabilities and shareholders’ equity $             104,431,602 $             100,711,982

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

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Independence Bancshares, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2015     2014 2015     2014
Interest income
       Loans $     830,994 $     855,185       $     1,658,458 $     1,668,321
       Investment securities 84,908 131,221 179,546   266,918
       Federal funds sold and other 12,744     7,487   22,032   16,378
                     Total interest income   928,646 993,893 1,860,036 1,951,617
 
Interest expense
       Deposits 79,930 71,396 154,886 146,090
       Borrowings 3,052 52 13,387 74
                     Total interest expense 82,982 71,448 168,273 146,164
  
                     Net interest income 845,664 922,445 1,691,763 1,805,453
Reversal of provision for loan losses - (30,000 ) - (30,000 )
 
                     Net interest income after reversal of provision
                            for loan losses 845,664 952,445 1,691,763 1,835,453
  
Non-interest income
       Service fees on deposit accounts 19,845 13,511 40,896 22,669
       Residential loan origination fees 76,478 43,478 109,352 89,198
       Gain on sale of investment securities - - 41,148 -
       Gain on sale of loans held for sale - - - 118,452
       Other income 12,846 10,990 61,979 22,085
                     Total non-interest income 109,169 67,979 253,375 252,404
 
Non-interest expenses
       Compensation and benefits 738,580 662,377 1,385,307 1,351,223
       Real estate owned activity 250,838 388,294 258,953 487,968
       Occupancy and equipment 155,933 154,539 315,786 310,617
       Insurance 52,507 78,745 106,941 162,715
       Data processing and related costs 83,159 82,972 164,972 168,836
       Professional fees 216,040 247,129 330,963 431,342
       Product research and development expense 733,238 1,474,508 929,170 2,504,429
       Other 81,805 98,779 168,874 183,632
                     Total non-interest expenses 2,312,100 3,187,343 3,660,966 5,600,762
                     Loss before income tax expense (1,357,267 ) (2,166,919 ) (1,715,828 ) (3,512,905 )
 
Income tax expense - - 5,080 -
                     Net loss $ (1,357,267 ) $ (2,166,919 ) $ (1,720,908 ) $ (3,512,905 )
 
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on investment securities available for
sale, net of tax (205,561 ) 411,133 (182,599 ) 741,298
                     Reclassification adjustment included in net loss,
                     net of tax - - 41,148 -
                     Other comprehensive income (loss) (205,561 ) 411,133 (141,451 ) 741,298
 
              Total comprehensive loss $ (1,562,828 ) $ (1,755,786 ) $ (1,862,359 ) $ (2,771,607 )
Loss per common share – basic and diluted $ (.07 ) $ (.11 ) $ (.08 ) $ (.17 )
Weighted average common shares outstanding – basic and   
diluted 20,502,760 20,502,760 20,502,760 20,502,760

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

3



Independence Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)

Accumulated other
Common stock Preferred stock Additional comprehensive Accumulated
    Shares     Amount     Shares     Amount     paid-in capital     income (loss)     deficit     Total
December 31, 2013 20,502,760 $    205,028 - $    - $    34,738,643 $            (1,216,718 ) $    (19,419,797 ) $    14,307,456
Compensation expense related to
       stock options granted - - - - 227,240 - - 227,240
Net loss - - - - - - (3,512,905 ) (3,512,905 )
 
Other comprehensive income - - - - - 741,298 - 741,298
 
June 30, 2014 20,502,760 $ 205,028 - $ - $ 34,965,883 $ (475,420 ) $ (22,932,402 ) $ 11,763,089
 
December 31, 2014 20,502,760 $ 205,028 - $ - $ 35,124,151 $ 1,154 $ (25,919,753 ) $ 9,410,580
Compensation expense related to
       stock options granted - - - - 191,695 - - 191,695
Issuance of preferred stock –net
       of expenses - - 8,425 84 7,615,493 - - 7,615,577
Net loss - - - - - - (1,720,908 ) (1.720.908 )
 
Other comprehensive loss - - - - - (141,451 ) - (141,451 )
 
June 30, 2015 20,502,760 $ 205,028 8,425 $ 84 $ 42,931,339 $ (140,297 ) $ (27,640,661 ) $ 15,355,493

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

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Independence Bancshares, Inc.

Consolidated Statements of Cash Flows
(unaudited)

Six Months Ended
June 30,
2015 2014
Operating activities        
       Net loss $      (1,720,908 ) $      (3,512,905 )
       Adjustments to reconcile net loss to cash used in operating activities
              Reversal of provision for loan losses - (30,000 )
              Depreciation 107,509 106,293
              Amortization of investment securities discounts/premiums, net 106,107 123,302
              Gain on sale of loans held for sale -   (118,452 )
              Gain on sale of investment securities (41,148 ) -
              Stock option expense related to stock options granted 191,695 227,240
              Net changes in fair value and (gains) losses on other real estate owned and
                            repossessed assets 212,162 408,092
              (Increase) decrease in other assets, net (345,097 ) 195,479
              Increase (decrease) in other liabilities, net (1,405,876 ) 574,698
                     Net cash used in operating activities (2,895,556 ) (2,026,253 )
 
Investing activities
       Net decrease (increase) in loans 2,683,581 (3,427,796 )
       Proceeds from sale of loans held for sale - 1,033,000
       Maturities and sales of investment securities available for sale 533,287 -
       Purchases of investment securities available for sale (300,000 ) -
       Repayments of investment securities available for sale 587,441 706,877
       Redemption of non-marketable equity securities, net 204,050 42,100
       Purchase of property, equipment and software (10,356 ) (39,995 )
       Proceeds from sale of other real estate owned and repossessed assets 582,295 207,788
                     Net cash provided by (used in) provided by investing activities 4,280,298 (1,478,026 )
 
Financing activities
       Increase (decrease) in deposits, net 4,751,575 (1,262,576 )
       Repayments on borrowings (5,000,000 ) -
       Repayments on note payable (450,226 ) -
       Issuance of preferred stock 7,615,577 -
       (Decrease) increase in securities sold under agreements to repurchase (120,171 ) 124,588
                     Net cash provided by (used in) financing activities 6,796,755 (1,137,988 )
 
Net increase (decrease) in cash and cash equivalents 8,181,497 (4,642,267 )
 
Cash and cash equivalents at beginning of the period 10,904,080 14,421,955
 
Cash and cash equivalents at end of the period $ 19,085,577 $ 9,779,688
 
Supplemental information:
              Cash paid for
                     Interest $ 167,347 $ 145,758
                     Income taxes $ 5,080 $ -
              Schedule of non-cash transactions
                            Unrealized gain (loss) on securities available for sale, net of tax $ (141,151 ) $ 741,298
                            Loans transferred to other real estate owned and repossessed assets $ 300,000 $ 1,143,000

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

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Notes to Unaudited Consolidated Financial Statements

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Independence Bancshares, Inc. (the “Company”) is a South Carolina corporation organized to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act of 1996, and to own and control all of the capital stock of Independence National Bank (the “Bank”). The Bank is a national association organized under the laws of the United States to conduct general banking business in Greenville, South Carolina. The Bank operates three full service branch offices in Greenville, South Carolina. On May 31, 2005, the Company sold 2,085,010 shares of its common stock in its initial public offering. All shares were sold at $10.00 per share. The offering raised approximately $20.5 million, net of offering costs. On December 31, 2012, the Company sold 17,648,750 shares of its common stock to certain accredited investors in a Private Placement (the “Private Placement”), which equated to gross proceeds of $14.1 million. All shares were sold at $0.80 per share. On August 1, 2013, the Company sold 769,000 shares of its common stock at a price of $0.80 per share to certain existing shareholders in a follow-on offering for gross proceeds of approximately $615,200 (the “Follow-on Offering”). On May 14, 2015, the Company issued 8,425 shares of Series A convertible preferred stock (the “Series A Shares”) to certain institutional investors and members of the Company’s management team for gross cash proceeds of approximately $8,425,000, at a price of $1,000 per share (the “Series A Private Placement). In connection with the Series A Private Placement, the Company paid commissions in the aggregate amount of 5% of the gross proceeds of the Series A Private Placement, excluding sales to the Company’s management team. The Company intends to use the proceeds from the Series A Private Placement for general corporate purposes, including, but not limited to, supporting the Company’s expansion of its digital banking business. In addition, on May 14, 2015, the Company entered into a license agreement with MPIB Holdings, LLC (“MPIB”) pursuant to which it received a non-exclusive, non-transferable, non-licensable, worldwide license to use certain intellectual property of MPIB related to mobile payments and digital transactions. The license agreement will continue until the intellectual property of MPIB is purchased by the Company (the “asset purchase”). The license agreement will terminate on November 14, 2016 if the MPIB asset purchase has not been consummated by that date.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements have been prepared assuming that the Company will continue as a going concern. See Note 2 regarding the Company’s liquidity and capital considerations. The Company has reported losses from operations for all of 2014 and the three and six months ended June 30, 2015. Under Regulation W, the Bank may not be a source of cash or capital for the Company. Therefore, although we raised $8,425,000 in the Series A Private Placement, due to the uncertainty of timing and amount of cash needed for current outstanding commitments, the current run rate on fixed expenses, the current payables, and the prohibition within Regulation W, we believe that the Company may not have sufficient working capital to continue to fund its current level of activities without raising additional funding. This raises substantial doubt about the Company’s ability to continue as a going concern, and the financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to raise additional capital will depend on a number of factors, including conditions in the capital markets, which are outside our control. There is a risk we will not be able to raise the capital we need at all or upon favorable terms. If we cannot raise additional capital, we may not be able to implement our growth objective for our business, and we may be subject to increased regulatory supervision and restrictions. These restrictions would most likely have a material adverse effect on our ability to grow and expand which would negatively impact our financial condition and results of operations. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC and Management’s Discussion and Analysis in this Form 10-Q. Operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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.

6



Use of Estimates

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

Business Segments

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

Subsequent Events

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

NOTE 2 – LIQUIDITY AND CAPITAL CONSIDERATIONS

The Company

The Company’s cash balances, independent of the Bank, were approximately $5.1 million and its real estate held for sale (which serves as collateral for the Company’s note payable) was $754,100 at June 30, 2015 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The increase in liquid assets of approximately $4.8 million is due primarily to the receipt of gross cash proceeds of approximately $8,425,000 related to the Series A Private Placement, partially offset by the payment of commissions and expenses in connection with the Series A Private Placement and expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $1.1 million and a note payable to a related party of $149,774 (secured by the real estate held for sale by the Company) which was advanced in September 2014. See “Note 8 – Business Segments”, and “Note 9 - Note Payable” for additional information related to the transaction services segment and the related advance. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC as well as “Note 1 – Nature of Business and Basis of Presentation” and Management’s Discussion and Analysis in this Form 10-Q.

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We currently have $19.1 million in cash and fed funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at June 30, 2015 amounted to $14.6 million, or 14.2% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At June 30, 2015, $3.0 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.

7



The Bank is a member of the FHLB, from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At June 30, 2015, we had collateral that would support approximately $39.4 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $9.7 million as of June 30, 2015.

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

We believe our liquidity sources are adequate to meet our operating needs at the Bank. However, we continue to carefully focus on liquidity management during 2015. Comprehensive weekly and monthly liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan pay downs and amount and cost of available borrowing sources, including secured overnight federal funds lines with our various correspondent banks.

The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio and was 32.2% at June 30, 2015 compared to 26.3% as of December 31, 2014. The increase in liquidity is due to the increase in fed funds sold, primarily as a result of the receipt of proceeds from the Series A Private Placement.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

At June 30, 2015 and December 31, 2014, the Company had restricted cash totaling $2,000 with the Federal Home Loan Bank (“FHLB”) of Atlanta. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Net Loss per Common Share - Basic loss per common share represents net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. For the three and six month periods ended June 30, 2015 and June 30, 2014, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

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

8



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

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

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

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

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

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

For the six month period ended June 30, 2015, we recognized $5,080 in state income tax expense due to our net operating income in 2014 at the Bank. We did not recognize any income tax benefit or expense for the three month period ended June 30, 2015 due to our net loss in 2015 at the Bank. We did not recognize any income tax benefit or expense for the three and six month periods ended June 30, 2014 due to our net operating loss carryforward position. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

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

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

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

9



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 modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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

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

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

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

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

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

10



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:

June 30, 2015  
Amortized Gross Unrealized Fair
Cost       Gains       Losses       Value
Government-sponsored mortgage-backed $      6,421,231 $      77,433 $      (154,584 ) $      6,344,080
Collateralized mortgage-backed 2,037,680   - (52,444 )   1,985,236
Municipals, tax-exempt   4,956,313 25,450 (49,934 ) 4,931,829
Municipals, taxable 1,312,866 13,782 - 1,326,648
       Total investment securities $ 14,728,090 $ 116,665 $ (256,962 ) $ 14,587,793
 
  December 31, 2014
Amortized Gross Unrealized Fair
Cost       Gains       Losses       Value
Government-sponsored mortgage-backed $      7,597,334 $      122,491 $      (118,308 ) $      7,601,517
Collateralized mortgage-backed 2,040,478 - (57,518 ) 1,982,960
Municipals, tax-exempt 4,658,532 68,643 (30,179 ) 4,696,996
Municipals, taxable 1,317,433 16,620 - 1,334,053
       Total investment securities $ 15,613,777 $ 207,754 $ (206,005 ) $ 15,615,526

The following table presents information regarding securities with unrealized losses at June 30, 2015:

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
Government-sponsored mortgage-backed $ 670,647 $ 13,368 $ 2,347,337   $ 141,216   $ 3,017,984   $ 154,584
Collateralized mortgage-backed -   - 1,985,236 52,444 1,985,236 52,444
Municipals, tax-exempt 752,337 12,531 1,056,460 37,403 1,808,797 49,934
Total temporarily impaired securities $      1,422,984 $      25,899 $      5,389,033 $      231,063 $      6,812,017 $      256,962

The following table presents information regarding securities with unrealized losses at December 31, 2014:

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
Government-sponsored mortgage-backed $      - $      - $      3,247,141 $      118,308 $      3,247,141 $      118,308
Collateralized mortgage-backed - - 1,982,960 57,518 1,982,960 57,518
Municipals, tax-exempt - - 1,072,090 30,179 1,072,090 30,179
Total temporarily impaired securities $ - $ - $ 6,302,191 $ 206,005 $ 6,302,191 $ 206,005

11



At June 30, 2015, investment securities with a fair value of $1,422,984 and unrealized losses of $25,899 had been in a continuous loss position for less than twelve months. At June 30, 2015, investment securities with a fair value of approximately $5.4 million and unrealized losses of $231,063 had been in a continuous loss position for more than twelve months. All remaining investment securities, which were rated at AA+ or AAA grade, were in an unrealized gain position. The Company believes that, based on industry analyst reports and credit ratings, the deterioration in the fair value of these investment securities available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company has the ability and intent to hold these securities until such time as the values recover or the securities mature. At December 31, 2014, investment securities with a fair value of $6.3 million and unrealized losses of $206,005 had been in a continuous loss position for more than one year. All remaining investment securities were in an unrealized gain position.

The amortized costs and fair values of investment securities available for sale at June 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers have the right to prepay the obligations.

June 30, 2015
Amortized       Fair
Cost Value
Due within one year $      $     
Due after one through three years  
Due after three through five years
Due after five through ten years   2,823,666 2,780,399
Due after ten years 11,904,425 11,807,394
       Total investment securities $ 14,728,091 $ 14,587,793

NOTE 5 – LOANS

At June 30, 2015, our gross loan portfolio consisted primarily of $31.4 million of commercial real estate loans, $16.7 million of commercial business loans, and $18.0 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2014 10-K.

On March 5, 2015, one nonaccrual loan at the Bank for $343,266 was transferred to other real estate owned for $300,000, net of a specific reserve, which includes $34,327 in selling costs, of $43,266. The specific reserve was included in the December 31, 2014 allowance amounts.

Certain credit quality statistics related to our loan portfolio have changed or declined 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 deterioration continues, we may increase 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. An increase in the allowance for loan losses would result in a higher 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.

12



The following table summarizes delinquencies and nonaccruals, by portfolio class, as of June 30, 2015 and December 31, 2014.

Single and
multifamily Construction Commercial
residential and real estate - Commercial
June 30, 2015       real estate     development     other     business     Consumer     Total
30-59 days past due $ 935,962 $ - $ 564,226 $ 20,838 $ - $ 1,521,026
60-89 days past due - 280,321 727,054 - - 1,007,375
Nonaccrual - 39,066 190,871 85,139 - 315,076
Total past due and nonaccrual 935,962 319,387 1,482,151 105,977 - 2,843,477
Current 15,736,607 7,759,556 21,830,527 16,604,782 1,361,248 63,292,720
       Total loans (gross of $ 16,672,569 $ 8,078,943 $ 23,312,678 $ 16,710,759 $ 1,361,248 $ 66,136,197
deferred fees)
Deferred fees   (135,602 )
Loan loss reserve (989,509 )
Total Loans, net $ 65,011,086
 
 
Single and
multifamily Construction Commercial
residential and real estate - Commercial
December 31, 2014   real estate development other business Consumer   Total
30-59 days past due $ 188,033 $ 39,561 $ - $ 23,938 $ - $ 251,532
60-89 days past due - - - 9,129 - 9,129
Nonaccrual   - -   534,057 - - 534,057
Total past due and nonaccrual 188,033 39,561 534,057 33,067     - 794,718
Current 17,885,396   8,385,892 24,712,339 16,026,015 1,372,906 68,382,548
       Total loans (gross of $      18,073,429 $      8,425,453 $      25,246,396 $      16,059,082 $      1,372,906 $      69,177,266
deferred fees)            
Deferred fees (149,823 )
Loan loss reserve (1,032,776 )
Total Loans, net $ 67,994,667

At June 30, 2015 and December 31, 2014, there were nonaccrual loans of $315,076 and $534,057, respectively. Foregone interest income related to nonaccrual loans equaled $10,535 for the six months ended June 30, 2015. Foregone interest income related to nonaccrual loans equaled $17,696 for the six months ended June 30, 2014. No interest income was recognized on nonaccrual loans during the six month periods ended June 30, 2015. At June 30, 2015 and December 31, 2014, there were no accruing loans which were contractually past due 90 days or more as to principal or interest payments.

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

13



The following table summarizes management’s internal credit risk grades, by portfolio class, as of June 30, 2015 and December 31, 2014.

Single and
multifamily Construction Commercial
residential and real estate - Commercial
June 30, 2015       real estate       development       other       business       Consumer       Total
Pass Loans $ 9,727,234 $ 1,110,195 $ - $ - $ 1,361,248 $ 12,198,677
Grade 1 - Prime - - - - - -
Grade 2 - Good - - - 69,849 - 69,849
Grade 3 - Acceptable 2,435,577 1,342,081 7,178,930 6,416,224 - 17,372,812
Grade 4 – Acceptable w/ Care 3,510,100 5,266,781 13,861,228 8,994,210 - 31,632,319
Grade 5 – Special Mention 63,696 79,565 1,346,641 860,579 - 2,350,481
Grade 6 - Substandard 935,962 280,321 925,879 369,897 - 2,512,059
Grade 7 - Doubtful - - - - - -
       Total loans (gross of deferred fees) $      16,672,569 $      8,078,943 $      23,312,678 $      16,710,759 $      1,361,248 $      66,136,197
  
Single and
multifamily Construction Commercial
residential and real estate - Commercial
December 31, 2014 real estate development other business Consumer Total
Pass Loans $ 10,739,155 $ 1,362,322 $ - $ - $ 1,341,699 $ 13,443,176
Grade 1 - Prime - -   - - - -
Grade 2 - Good - - - 1,652,739 - 1,652,739
Grade 3 - Acceptable 2,594,126 1,284,107 9,123,260 4,629,684 31,207   17,662,384
Grade 4 – Acceptable w/ Care 3,792,456   5,277,692 14,184,482 9,754,850 -   33,009,480
Grade 5 – Special Mention   - 82,413 645,152   -   - 730,565
Grade 6 - Substandard   947,692   418,919 1,290,502 21,809   - 2,678,922
Grade 7 - Doubtful - -   -   - - -
       Total loans (gross of deferred fees) $ 18,073,429 $ 8,425,453 $ 25,246,396 $ 16,059,082 $ 1,372,906 $ 69,177,266

Loans graded one through four are considered “pass” credits. At June 30, 2015, approximately 93% of the loan portfolio had a credit grade of “pass” compared to 95% at December 31, 2014. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. As of June 30, 2015, we had loans totaling approximately $2.4 million classified as special mention compared to $730,565 as of December 31, 2014. This classification is utilized when an initial concern is identified about the financial health of a borrower. Loans are designated as such in order to be monitored more closely than other credits in the loan portfolio. At June 30, 2015, substandard loans totaled $2.5 million, with all loans being collateralized by real estate compared to $2.7 million at December 31, 2014. Substandard credits are evaluated for impairment on a quarterly basis.

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

14



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 June 30, 2015, impaired loans totaled $1.8 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 $246,067 from December 31, 2014 due to one loan being transferred to other real estate owned for $300,000, net of charge-offs of $43,267 and approximately $71,000 in loan balance reductions through pay downs during the six months ended June 30, 2015, partially offset by two new loans being deemed impaired for $124,775. 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 June 30, 2015, we had loans totaling approximately $782,000 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 June 30, 2015 and December 31, 2014.

Unpaid Average Year to date
principal Recorded Related impaired interest
June 30, 2015 balance       investment       allowance       investment       income
With no related allowance recorded:
       Single and multifamily residential real estate $ 718,873 $ 718,873 $ - $ 662,981 $ 19,741
       Construction and development - - - 166,477 -
       Commercial real estate - other 190,871 190,871 - 210,115 -
With related allowance recorded:
       Single and multifamily residential real estate - - - 221,047 -
       Construction and development 39,636 39,636 9,636 337,992 727
       Commercial real estate - other 735,008 735,008 24,008     692,201 17,798
       Commercial business 85,138   85,138 23,745 36,957 1,532
       Consumer - - - - -
Total:
       Single and multifamily residential real estate 718,873 718,873 - 884,028 19,741
       Construction and development 39,636   39,636 9,636 504,469 727
       Commercial real estate - other     925,879 925,879     24,008 902,316   17,798
       Commercial business 85,138 85,138 23,745 36,957   1,532
       Consumer - - - - -
$      1,769,526 $      1,769,526 $      57,389 $      2,327,770 $      39,798
 
 
December 31, 2014
With no related allowance recorded:
       Single and multifamily residential real estate $ 725,090 $ 725,090 $ - $ 604,851 $ 44,239
       Construction and development - - - 332,954 -
       Commercial real estate - other 190,791 190,791 - 229,385 -
       Commercial business - - - - -
       Consumer - - - - -
With related allowance recorded:
       Single and multifamily residential real estate - - - 442,094 -
       Construction and development - - - 649,560 -
       Commercial real estate - other 1,099,712 1,099,712 88,712 645,833 42,321
       Commercial business - - - 17,156 -
       Consumer - - - - -
Total:
       Single and multifamily residential real estate 725,090 725,090 - 1,046,945 44,239
       Construction and development - - - 982,514 -
       Commercial real estate - other        1,290,503 1,290,503 88,712 875,218 42,321
       Commercial business - - - 17,156 -
       Consumer - - - - -
$ 2,015,593 $ 2,015,593 $ 88,712 $ 2,921,833 $ 86,560

15



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 June 30, 2015 and December 31, 2014, the principal balance of TDRs was approximately zero and $343,000, respectively. As of June 30, 2015, the principal balance of TDRs was zero as the loan had been transferred to other real estate owned. During the six months ended June 30, 2014, the loans previously classified as loans held for sale were sold for total proceeds of $1,033,000. A success fee of approximately $41,000 and a gain of approximately $118,000 was recognized as a result of this sale.

There were no loans modified as troubled debt restructurings within the previous 12-month period for which there was a payment default during the six months ended June 30, 2015.

Provision and Allowance for Loan Losses

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

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

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

16



The following table summarizes activity related to our allowance for loan losses for the six months ended June 30, 2015 and 2014, by portfolio segment.

Single and
multifamily Construction Commercial
residential and real estate - Commercial
June 30, 2015       real estate       development       other       business       Consumer       Total
Allowance for loan losses:
Balance, beginning of period $ 160,797 $ 234,130 $ 363,097 $ 184,679 $ 90,073 $ 1,032,776
Reversal of provision for loan losses (5,980 ) (39,833 ) (6,043 ) 133,496 (81,640 ) -
Loan charge-offs - - (43,267 ) - - (43,267 )
Loan recoveries - - - - - -
       Net loans charged-off - - (43,267 ) - - (43,267 )
Balance, end of period $ 154,817 $ 194,297 $ 313,787 $ 318,175 $ 8,433 $ 989,509
 
Individually reviewed for impairment $ - $ 9,636 $ 24,008 23,745 $ - $ 57,389
Collectively reviewed for impairment 154,817 184,661 289,779 294,430 8,433 932,120
Total allowance for loan losses $ 154,817 $ 194,297 $ 313,787 $ 318,175 $ 8,433 $ 989,509
  
Gross loans, end of period:
Individually reviewed for impairment $ 718,873 $ 39,636 $ 925,879 $ 85,138 $ - $ 1,769,526
Collectively reviewed for impairment 15,953,696 8,039,307 22,386,799 16,625,621 1,361,248   64,366,671
Total loans (gross of deferred fees) $      16,672,569 $      8,078,943 $      23,312,678 $      16,710,759 $      1,361,248 $      66,136,197
  
 
June 30, 2014
Allowance for loan losses:
Balance, beginning of year $ 268,757 $ 710,010 $ 206,176 $ 26,870 $ 90,073 $ 1,301,886
Reversal of provision for loan losses - (30,000 ) - -   -     (30,000 )
Loan charge-offs (50,000 ) (344,577 ) 100,000   75,000 - (219,577 )
Loan recoveries - -   3,427   -   73,567 76,994
       Net loans charged-off (50,000 ) (344,577 ) 103,427 75,000 73,567 (142,583 )
Balance, end of period $ 218,757 $ 335,433   $ 309,603   $ 101,870 $ 163,640 $ 1,129,303
 
Individually reviewed for impairment $ 6,701 $ - $ 240,352 - $ - $ 247,053
Collectively reviewed for impairment   212,056     335,433   69,251 101,870 163,640 882,250
Total allowance for loan losses $ 218,757   $ 335,433 $ 309,603 $ 101,870 $ 163,640 $ 1,129,303
  
Gross loans, end of period:
Individually reviewed for impairment $ 817,994 $ 484,490 $ 963,786 $ - $ - $ 2,266,270
Collectively reviewed for impairment   16,758,867 8,585,585 22,216,702 14,688,436 1,396,081 63,645,671
Total loans (gross of deferred fees) $ 17,576,861 $ 9,070,075 $ 23,180,488 $ 14,688,436 $ 1,396,081 $ 65,911,941

      June 30, 2015       June 30, 2014
Nonaccrual loans $ 315,076 $ 516,402
Average gross loans $ 67,574,879 $ 65,654,838
Net loans charged-off as a percentage of average gross loans   .47 % .42 %
Allowance for loan losses as a percentage of total gross loans   1.50 %     1.71 %
Allowance for loan losses as a percentage of non-accrual loans 314.05 % 218.69 %

17



Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. Beginning first quarter 2012, we began using the average of the last eight quarters of our charge-off history versus the prior three years with a heavier weight on the most recent year, both adjusted for portfolio and economic factors. The general reserve as a percentage of collectively evaluated loans has increased from 1.36% at December 31, 2014 to 1.36% at June 30, 2015. While management utilizes the best judgment and information available to it, the ultimate adequacy of the allowance for loan losses depends on a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

After one but
One year or within five After five
      less       years       years       Total
June 30, 2015
       Single and multifamily residential real estate $ 3,457,151 $ 8,512,782 $ 4,702,636 $ 16,672,569
       Construction and development 3,423,542 4,271,268 384,133 8,078,943
       Commercial real estate - other 5,821,042 17,101,844 389,792 23,312,678
       Commercial business 5,334,322 10,488,792 887,645 16,710,759
       Consumer 828,018 517,302 15,928   1,361,248
       Total $      18,864,075 $      40,891,988 $      6,380,134 $      66,136,197
  
After one but
  One year or within five After five
less years years   Total
December 31, 2014
       Single and multifamily residential real estate $ 5,290,321 $ 8,197,828 $ 4,585,280 $ 18,073,429
       Construction and development 2,257,649 5,599,646 568,158 8,425,453
       Commercial real estate - other   4,085,577   20,504,283   656,536 25,246,396
       Commercial business 5,767,504   9,521,755   769,823 16,059,082
       Consumer 801,306 555,693 15,907 1,372,906
       Total $ 18,202,357 $ 44,379,205 $ 6,595,704 $ 69,177,266

Loans maturing after one year with:       June 30, 2015       December 31, 2014
Fixed interest rates   $ 19,138,575   $ 20,047,083
Floating interest rates $        28,133,547 $ 30,927,826

NOTE 6 – FAIR VALUE

Assets and Liabilities Measured at Fair Value

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

Available-for-sale investment securities ($14,587,793 and $15,615,526 at June 30, 2015 and December 31, 2014, respectively) are carried at fair value and measured on a recurring basis using Level 2 inputs. Fair values are estimated by using bid prices and quoted prices of pools or tranches of securities with similar characteristics.

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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 June 30, 2015, all impaired loans were evaluated on a nonrecurring basis based on the market value of the underlying collateral. Market values are generally obtained using independent appraisals or other market data, which the Company considers to be Level 3 inputs. The aggregate carrying amount, net of specific reserves, of impaired loans carried at fair value at June 30, 2015 and December 31, 2014 was $1.8 million and $1.9 million, respectively.

Other real estate owned and repossessed assets, generally consisting of properties or other collateral obtained through foreclosure or in satisfaction of loans, are carried at the lower of cost or market value and measured on a non-recurring basis. Market values are generally obtained using independent appraisals which are generally prepared using the income or market valuation approach, adjusted for estimated selling costs which the Company considers to be Level 3 inputs. The carrying amount of other real estate owned and repossessed assets carried at fair value at June 30, 2015 and December 31, 2014 was $2.1 million and $2.6 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 June 30, 2015, the significant observable inputs used in the fair value measurements were as follows:

Fair Value at Significant
Description       June 30, 2015       Valuation Technique       Unobservable Inputs
Other real estate owned and repossessed assets   $ 2,063,000   Appraised value Discounts to reflect current market conditions, abbreviated holding period, and estimated costs to sell
  
Impaired loans $ 1,712,137 Internal assessment based on external third party appraised value Adjustments to estimated value based on recent sales of comparable collateral

For Level 3 assets measured at fair value on a non-recurring basis as of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

Fair Value at Significant
Description       December 31, 2014       Valuation Technique       Unobservable Inputs
Other real estate owned and repossessed assets   $ 2,557,457   Appraised value Discounts to reflect current market conditions and estimated costs to sell
  
Impaired loans $ 1,926,881 Internal assessment based on external third party 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.

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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 June 30, 2015 and December 31, 2014 are as follows:

Carrying
June 30, 2015       Amount       Fair Value       Level 1       Level 2       Level 3
Financial Assets:
Cash and due from banks $ 5,081,577 $ 5,081,577 $ 5,081,577 - -
Federal funds sold 14,004,000 14,004,000 14,004,000 - -
Investment securities
available for sale 14,587,793   14,587,793   - 14,587,793 -
Non-marketable equity  
securities 405,600 405,600 - 405,600   -
Loans, net 65,011,086 64,945,085 - - 64,945,085
  
Financial Liabilities:
Note payable 149,774 150,759 -   150,759 -
Deposits 87,626,238 86,595,108 - 86,595,108 -
Securities sold under  
agreements to repurchase 33,432 33,432 - 33,432 -
   
  
Carrying
December 31, 2014 Amount Fair Value Level 1 Level 2 Level 3
Financial Assets:  
Cash and due from banks $ 5,261,080 $ 5,261,080 $ 5,261,080 $ - $ -
Federal funds sold 5,643,000 5,643,000      5,643,000 - -
Investment securities    
available for sale 15,615,526 15,615,526 -        15,615,526 -
Non-marketable equity    
securities 609,650   609,650 - 609,650 -
Loans, net      67,994,667      67,925,640 - -      67,925,640
 
Financial Liabilities:
FHLB advance 5,000,000 5,000,347 - 5,000,347 -
Note payable 600,000 603,567 - 603,567 -
Deposits 82,874,663 81,928,307 - 81,928,307 -
Securities sold under
agreements to repurchase 153,603 153,603 - 153,603 -

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NOTE 7 – STOCK COMPENSATION PLANS

On July 26, 2005, the Company adopted the Independence Bancshares, Inc. 2005 Stock Incentive Plan (“2005 Incentive Plan”) for the benefit of the directors, officers and employees. The 2005 Incentive Plan initially reserved up to 260,626 shares of the Company’s common stock for the issuance of stock options and contained evergreen provision, which provided that the maximum number of shares to be issued under the 2005 Incentive Plan would automatically increase each time the Company issues additional shares of common stock such that the total number of shares issuable under the 2005 Incentive Plan would at all times equal 12.5% of the then outstanding shares of common stock. Accordingly, with the closing of the Private Placement on December 31, 2012, the number of shares reserved for the issuance of stock options under the 2005 Incentive Plan increased from 260,626 shares to 2,466,720 shares. As of the tenth anniversary of the 2005 Incentive Plan, or July 26, 2015, no new options may be issued under such plan. After July 26, 2015, 2,303,605 shares of common stock eligible to be issued upon the exercise of outstanding option awards under this plan.

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

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

During the year ended December 31, 2013, the Company granted an additional 2,800,000 stock options to certain employees and an advisor to the Company under the 2005 Incentive Plan and the 2013 Incentive Plan, for a total outstanding of 3,273,505 options at a weighted average price of $1.08 at December 31, 2013. Of the 3,273,505 options issued, as of December 31, 2013, 1,168,505 options had vested.

In February 2014, the Company granted an additional 155,000 stock options at a price of $1.59 to certain employees and to a third-party contractor, for a total outstanding of 3,428,505 options at a weighted average price of $1.11. In April 2014, 240,000 options granted to one former employee were forfeited. In December 2014, 86,250 options granted to three employees and to a third-party contractor were forfeited because the qualifying event date for vesting passed with no performance. As of December 31, 2014, 3,102,255 total options were outstanding at a weighted average price of $1.11. Of the 3,102,255 options issued, 2,186,005 options had vested on that date.

In May 2015, the Company granted an additional 115,000 stock options at a price of $0.65 to certain directors and the chairman of the Company, for a total outstanding of 3,217,255 options at a weighted average price of $1.10. As of June 30, 2015, of the 3,217,255 total options were outstanding at a weighted average price of $1.10. Of the 3,217,255 options outstanding, 2,699,130 options had vested.

Compensation expense related to stock options granted was $191,695 and $227,240 for the six months ended June 30, 2015 and June 30, 2014, respectively. Compensation expense is based on the fair value of the option estimated at the date of grant using the Black-Scholes option-pricing model. Compensation expense is recognized on a straight line basis over the vesting period of the option.

NOTE 8 – BUSINESS SEGMENTS

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

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The following tables present selected financial information for the Company’s reportable business segments for the three and six months ended June 30, 2015 and 2014.

Holding Company        
Community Transaction Asset Parent
      Banking       Services       Management       Only (1)       Total
For the three months ended
June 30, 2015  
Interest income $ 928,646 $ $ $ $ 928,646
Interest expense   79,995   2,987 82,982
Net interest income   848,651 (2,987 ) 845,664  
Reversal of provision for loan losses    
Noninterest income 109,150   19   109,169
Noninterest expense 1,237,721 713,590   5,206 355,583     2,312,100
Income (loss) before income taxes (279,920 )   (713,590 ) (5,206 )   (358,551 ) (1,357,267 )
Income taxes  
Net income (loss) $       (279,920 ) $       (713,590 ) $       (5,206 ) $       (358,551 ) $       (1,357,267 )

(1) Excludes equity in earnings of wholly-owned Bank subsidiary.

Holding Company        
Community Transaction Asset Parent
      Banking       Services       Management       Only (1)       Total
For the six months ended
June 30, 2015
Interest income $ 1,860,036 $ $ $ $ 1,860,036
Interest expense 155,703   12,570 168,273  
Net interest income 1,704,333 (12,570 ) 1,691,763
Reversal of provision for loan losses  
Noninterest income 218,711 33,327 1,337   253,375
Noninterest expense     2,220,904   990,022     (3,678 ) 453,718   3,660,966
Income (loss) before income taxes (297,860 )   (956,695 ) 3,678 (464,951 ) (1,715,828 )
Income taxes 5,080 5,080
Net income (loss) $     (302,940 ) $     (956,695 ) $     3,678 $     (464,951 ) $     (1,720,908 )

(1) Excludes equity in earnings of wholly-owned Bank subsidiary.

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Community
      Banking       Holding Company (2)       Eliminations       Total
As of June 30, 2015
Cash and due from banks $ 5,082,338 $ 5,065,754 $ (5,066,515 ) $ 5,081,577
Federal funds sold 14,004,000 14,004,000
Investment securities 14,587,793 14,587,793
Loans receivable, net 65,011,086 65,011,086
Other real estate owned 1,308,900 754,100 2,063,000
Property and equipment, 2,081,110 205,744 2,286,854
net
Other assets 915,616 481,676 1,397,292
Total assets $     102,990,843 $     6,507,274 $     (5,066,515 ) $     104,431,602
   
Deposits $ 92,692,753 $ $ (5,066,515 ) $ 87,626,238
Securities sold under  
agreements to repurchase 33,432       33,432
Note payable     149,774       149,774
Accrued and other 148,983 1,117,682 1,266,665
liabilities
Shareholders’ equity 10,115,675 5,239,818 15,355,493
Total liabilities and $ 102,990,843 $ 6,507,274 $ (5,066,515 ) $ 104,431,602
shareholders’ equity

(2) Excludes investment in wholly-owned Bank subsidiary
 
Holding Company
Community Transaction Asset Parent
      Banking       Services       Management       Only (1)       Total
For the three months ended
June 30, 2014
Interest income $ 993,893 $ $ $ $ 993,893
Interest expense 71,448     71,448
Net interest income   922,445           922,445
Reversal of provision for loan losses (30,000 )       (30,000 )
Noninterest income 103,056 (35,077 ) 67,979
Noninterest expense 990,038   1,474,508 439,029 283,768 3,187,343
Income (loss) before income taxes   65,463 (1,474,508 ) (439,029 ) (318,845 )   (2,166,919 )
Income taxes
Net income (loss) $     65,463 $     (1,474,508 ) $     (439,029 ) $     (318,845 ) $     (2,166,919 )

(1) Excludes equity in earnings of wholly-owned Bank subsidiary.

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Holding Company
Community Transaction Asset Parent
      Banking       Services       Management       Only (1)       Total
For the six months ended
June 30, 2014
Interest income $ 1,974,281 $ $ (22,664 ) $ $ 1,951,617
Interest expense 146,164 146,164
Net interest income   1,828,117   (22,664 )   1,805,453
Reversal of provision for loan losses   (30,000 )             (30,000 )
Noninterest income 203,645 118,452 (69,693 ) 252,404
Noninterest expense 1,952,599   2,504,429 579,431   564,303 5,600,762
Income (loss) before income taxes 109,163 (2,504,429 ) (483,643 )   (633,996 )   (3,512,905 )
Income taxes
Net income (loss) $       109,163 $       (2,504,429 ) $       (483,643 ) $       (633,996 ) $       (3,512,905 )

(1) Excludes equity in earnings of wholly-owned Bank subsidiary.
 
Community
      Banking       Holding Company (2)       Eliminations       Total
As of June 30, 2014
Cash and due from banks $ 6,385,369 $ 875,539 $ (253,220 ) $ 7,007,688
Federal funds sold 2,772,000 2,772,000
Investment securities 20,418,689 20,418,689
Loans receivable, net     64,668,498     64,668,498
Other real estate owned 1,625,000 1,410,290   3,035,290
Property and equipment, net 2,116,586 329,932 2,446,518
Other assets 535,985 312,494 (35,684 )   812,795
Total assets $ 98,522,127 $ 2,928,255 $ (288,904 ) $ 101,161,478
  
Deposits $ 88,159,321 $ $ (253,220 ) $ 87,906,101
Securities sold under  
agreements to repurchase 221,467   221,467
Accrued and other liabilities 191,355 1,115,150   (35,684 ) 1,270,821
Shareholders’ equity 9,949,984 1,813,105 11,763,089
Total liabilities and shareholders’ equity $       98,522,127 $       2,928,255 $       (288,904 ) $       101,161,478

(2) Excludes investment in wholly-owned Bank subsidiary

NOTE 9 — NOTE PAYABLE

In September 2014, the Company closed a $600,000 one-year borrowing. The loan was provided by a board member of the Bank and as a result needed to comply with Regulation O. Proceeds of the loan were used primarily to fund the research and development effort in the Transaction Services business segment. The loan is collateralized by a first perfected security interest in certain real estate assets of the Company. The loan was fully drawn at closing, and carries an annual interest rate of 7% per annum for the first six months on any outstanding borrowings and then steps up to 8% per annum for the remaining 6 months of the term. On March 18, 2015, one of the parcels of real estate was sold and a payment was made on the loan so that the outstanding balance of the loan was $149,774, which was equal to the balance on June 30, 2015.

NOTE 10 – BORROWINGS

In July 2014, the Bank obtained $5,000,000 in new FHLB advances in order to fund future loan growth. These advances were secured by $13.9 million in collateralized loans. The terms of this note required monthly interest payments through the January 2015 maturity date, at which time the advance was repaid in its entirety. No FHLB advances were outstanding as of June 30, 2015.

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

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

risks and uncertainties related to changes in economic conditions;

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

risks and uncertainties related to credit losses;

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

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

the lack of loan growth in recent years;

our ability to attract and retain key personnel;

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

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

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

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

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

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changes in political, legislative or regulatory conditions;

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

changes in deposit flows;

changes in accounting policies and practices; and

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

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

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our audited consolidated financial statements as of December 31, 2014, as filed in our 2014 Form 10-K.

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

Allowance for Loan Losses

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

Other Real Estate Owned and Repossessed Assets

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

Income Taxes

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

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Research and Development

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

Overview

The following discussion describes our results of operations for the three and six month periods ended June 30, 2015 and 2014 and also analyzes our financial condition as of June 30, 2015.

The Company

The Company’s cash balances, independent of the Bank, were approximately $5.1 million and its real estate held for sale was approximately $754,000 at June 30, 2015 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The increase in liquid assets of approximately $4.3 million is due primarily to $8,425,000 in gross proceeds received as a result of the Series A Private Placement, partially offset by commissions and expenses paid in connection with the offering, the repayment of approximately $1.5 million in accrued accounts payable and liabilities, and expenses incurred related to the transaction services segment. In addition, at June 30, 2015 the Company has payables due to unsecured vendors of $1.1 million and a note payable to a related party of $149,774 which was advanced in September 2014. See “Note 8 – Business Segments” and “Note 9 – Note Payable”, for additional information related to the transaction services segment and the related advance. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC as well as “Note 1 – Nature of Business and Basis of Presentation” and Management’s Discussion and Analysis in this Form 10-Q.

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 June 30, 2015, we had total assets at the Bank of $103.0 million compared to $98.8 million at December 31, 2014. The largest components of total assets at the Bank are net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $65.0 million, $14.6 million, $1.3 million, $14.0 million and $5.1 million, respectively, at June 30, 2015. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $68.0 million, $15.6 million, $1.4 million, $5.6 million and $5.1 million, respectively, at December 31, 2014. At June 30, 2015, we had total liabilities at the Bank of approximately $92.9 million compared to approximately $88.3 million at December 31, 2014. The largest components of total liabilities at the Bank are deposits, which were $92.7 million and $83.0 million at June 30, 2015 and December 31, 2014, respectively.

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The Consolidated Company

At June 30, 2015, we had total assets of $104.4 million, an increase of $3.7 million, or 3.7%, from total assets of $100.7 million at December 31, 2014. The largest components of our total assets are net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks, which were $65.0 million, $14.6 million, $2.1 million, $14.0 million and $5.1 million, respectively, at June 30, 2015. Comparatively, our net loans, investment securities available for sale, other real estate owned, federal funds sold and cash and due from banks totaled $68.0 million, $15.6 million, $2.6 million, $5.6 million and $5.3 million, respectively, at December 31, 2014.

Our liabilities and shareholders’ equity at June 30, 2015, totaled $89.1 million and $15.4 million, respectively, compared to liabilities of $91.3 million and shareholders’ equity of $9.4 million at December 31, 2014. The principal component of our liabilities is deposits, which were $87.6 million and $82.9 million at June 30, 2015 and December 31, 2014, respectively.

Our net loss was $1.4 million for the three months ended June 30, 2015, or $0.07 per share, a decrease of $809,652, or 37.4%, compared to a net loss of $2.2 million, or $0.11 per share, for the three months ended June 30, 2014. This decrease in net loss was primarily driven by decreases in product research and development expenses. The Company’s liquidity constraints during the late part of 2014 and first five and a half months of 2015 resulted in a moderate decrease in such research and development efforts.

Our net loss was $1.7 million for the six months ended June 30, 2015, or $0.08 per share, a decrease of $1.8 million, or 51.2%, compared to a net loss of $3.5 million, or $0.17 per share, for the six months ended June 30, 2014. This decrease in net loss was primarily driven by decreases in product research and development expenses. The Company’s liquidity constraints during the six months ended June 30, 2015 as well as the late part of 2014 resulted in a moderate decrease in such research and development efforts.

Transaction Services

We began offering digital banking, payments and transaction services in October 2013 on a limited basis and are focused on expanding and growing this line of business (the “digital banking business”). In addition to the online bill pay, person-to-person payments, ACH services, debit and credit cards, and merchant services, we now also offer mobile bill pay and person-to-person payments as well as mobile remote deposit capture. In conjunction with our efforts to purse these opportunities, we have begun offering services under the trade name “nD bancgroup” and, as described below, have taken steps to protect our intellectual property rights to that name.

In March 2014, we filed three patent applications with the U.S. Patent and Trademark Office covering concepts associated with mobile wallet messages among different software platforms; entered into multiple contracts with third party developers and vendors to support its business operations; and has received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) for an additional ABA number to support its operations, including its transaction services. We may also enter into agreements with vendors, payment networks and payment gateways as well as marketing and distribution partners and work with other banks and financial institutions in offering transaction and payment services or other forms of digital banking and payment services, in each case subject to the discretion of the board of directors and management and the receipt of any necessary regulatory approvals or non-objections.

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

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

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Results of Operations

Three months ended June 30, 2015 and 2014

We recorded a net loss of $1.4 million, or $0.07 per diluted share, for the quarter ended June 30, 2015, compared to a net loss of $2.2 million, or $0.11 per diluted share, for the quarter ended June 30, 2014. This decrease in net loss between comparable periods was primarily driven by decreases in research and development, professional fees and real estate owned activity, partially offset by an increase in compensation expense. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the three months ended June 30, 2015 and 2014. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees are amortized into interest income on loans.

For the Three Months Ended June 30,
2015 2014
Average Income/ Yield/ Average Income/ Yield/
    Balance     Expense     Rate     Balance     Expense     Rate
       Federal funds sold and other $      11,961,568 $      12,744      0.43 % $      4,123,428 $      7,487      0.73 %
       Investment securities 14,960,953 84,908 2.28 20,099,883 131,221 2.62
       Loans (1) 66,795,796 830,994 4.99 65,077,942 855,185   5.27
Total interest-earning assets $ 93,718,317 $ 928,646 3.97 % $ 89,301,253 $ 993,893 4.46 %
 
       NOW accounts $ 8,444,540 $ 2,568 0.12 % $ 7,065,940 $ 2,283 0.13 %
       Savings & money market 35,718,242 20,966 0.24 39,830,423 24,830 0.25
       Time deposits (excluding brokered  
              time deposits) 30,203,451 56,396 0.75 27,717,072 44,283 0.64
       Brokered time deposits - - - - - -
Total interest-bearing deposits 74,366,233 79,930 0.43 74,613,435 71,396 0.38
       Borrowings 303,183 3,052 4.04 135,975 52 -
Total interest-bearing liabilities $ 74,669,416 $ 82,982   0.45 % $ 74,749,410 $ 71,448 0.38 %
 
Net interest spread 3.53 % 4.08 %
Net interest income/ margin $ 845,664 3.62 % $ 922,445 4.14 %

(1)

Nonaccrual loans are included in average balances for yield computations.


For the three months ended June 30, 2015, we recognized $928,646 in interest income and $82,982 in interest expense, resulting in net interest income of $845,664, a decrease of $76,781, or 8.3%, over the same period in 2014. Average earning assets increased to $93.7 million for the three months ended June 30, 2015 from $89.3 million for the three months ended June 30, 2014, an increase of $4.4 million, or 4.9%. This increase in earning assets was primarily due to a $7.8 million increase in average federal funds sold and a $4.4 million increase in average loans between periods, partially offset by a $5.1 million decrease in average investment securities. Average interest bearing liabilities remained relatively consistent during the quarter ended June 30, 2015, with only a slight decrease of $79,994, or 0.1%. Net interest margin, calculated as annualized net interest income divided by average earning assets, decreased from 4.14% for the quarter ended June 30, 2014 to 3.62% for the quarter ended June 30, 2015, primarily due to a decrease in yield on earning assets from 4.46% to 3.97% between periods and an increase in cost of funds from 0.38% to 0.45% between periods due to the mix of liabilities and the timing of their repricing.

We did not recognize any provision for loan losses for the quarters ended June 30, 2015 and 2014. We recorded a reversal of provision for loan losses of $30,000 for the quarter ended June 30, 2014. The allowance as a percentage of gross loans decreased to 1.50% as of June 30, 2015 compared to 1.71% at June 30, 2014. Specific reserves were approximately $57,000 on impaired loans of $1.8 million as of June 30, 2015 compared to specific reserves of approximately $247,000 on impaired loans of $2.3 million as of June 30, 2014. As of June 30, 2015, the general reserve allocation was 1.46% of gross loans not impaired compared to 1.41% as of December 31, 2014. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.” 

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For the three months ended June 30, 2015, noninterest income was $109,169 compared to $67,979 for the three months ended June 30, 2014, an increase of $41,190, or 60.6%. Other noninterest income for the three months ended June 30, 2015 and 2014 was derived from service charges on deposits, customer service fees, and mortgage origination income. The primary contributor for this quarter’s increase was due to an increase in mortgage origination income of $33,000.

During the quarter ended June 30, 2015, we incurred noninterest expenses of $2.3 million, compared to noninterest expenses of $3.2 million for the quarter ended June 30, 2014, a decrease of $875,243, or 27.5%. This decrease in noninterest expenses for the three month period ended June 30, 2015 primarily resulted from a decrease in product research and development expenses of $741,270, a decrease of $137,456 in real estate owned activity which includes expenses to carry other real estate, gains and losses on sales of other real estate, and write-downs on real estate owned, and a decrease in professional fees of $31,089, partially offset by an increase in compensation and benefits expense of $76,203. Compensation and benefits increased $76,203 due to changes in staffing levels year over year for the quarter ended June 30, 2015.

We did not recognize any income tax benefit or expense for the three months ended June 30, 2015 due to our net operating loss in 2015 at the Bank. We did not recognize any income tax benefit or expense for the three month period ended June 30, 2014 due to our net operating loss carryforward position. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighing all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. We will continue to analyze our deferred tax assets and related valuation allowance on a quarterly basis, taking into account performance compared to forecasted earnings as well as current economic and internal information.

Six months ended June 30, 2015 and 2014

We recorded a net loss of $1.7 million or $0.08 per diluted share, for the six months ended June 30, 2015, a decrease in loss of approximately $1.8 million compared to a net loss of $3.5 million, or $0.17 per diluted share, for the six months ended June 30, 2014. This decrease between comparable periods was primarily driven by decreases in product research and development expense and real estate owned activity as well as a decrease in interest income. Each of these components is discussed in greater detail below.

The following table sets forth information related to our average balances, average yields on assets, and average costs of liabilities for the six months ended June 30, 2015 and 2014. We derived these yields by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees are amortized into interest income on loans.

For the Six Months Ended June 30, 2015
2015 2014
Average Income/   Yield/ Average Income/ Yield/
    Balance     Expense     Rate     Balance     Expense     Rate
       Federal funds sold and other $      11,321,611 $      22,032      0.39 % $      5,296,435 $      16,378      0.63 %
       Investment securities 15,195,669 179,546 2.39 20,123,919 266,918 2.68
       Loans (1) 67,574,879 1,658,458 4.96 65,654,838 1,668,321 5.14
Total interest-earning assets $ 94,092,159 $ 1,860,036 4.00 % $ 91,075,192 $ 1,951,617 4.33 %
 
       NOW accounts $ 8,046,969 $ 4,814 0.12 % $ 6,894,696 $ 5,394 0.16 %
       Savings & money market 35,908,680 41,783 0.24 40,076,142 48,224 0.24
       Time deposits (excluding brokered
              time deposits) 29,397,861 108,289 0.74 27,650,162 86,438 0.63
       Brokered time deposits - - - 783,819 6,034 1.56
Total interest-bearing deposits 73,353,510 154,886 0.43 75,404,819 146,090 0.39
       Borrowings 976,516 13,387 2.77 106,514 74 0.14
Total interest-bearing liabilities $ 74,330,026 $ 168,273 0.46 % $ 75,511,333 $ 146,164 0.39 %
 
Net interest spread 3.54 % 3.94 %
Net interest income/ margin $ 1,691,763 3.64 % $ 1,805,453 4.01 %

(1)

Nonaccrual loans are included in average balances for yield computations.

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For the six months ended June 30, 2015, we recognized $1.9 million in interest income and $168,273 in interest expense, resulting in net interest income of $1.7 million, a decrease of $113,690, or 6.3%, over the same period in 2014. Average earning assets increased to $94.1 million for the six months ended June 30, 2015 from $91.0 million for the six months ended June 30, 2014 a decrease of $3.0 million, or 3.3%. This increase in earning assets was due to a $1.9 million increase in average loans and a $6.0 million increase in average fed funds sold, partially offset by a $4.9 million decrease in average investment securities between periods. Average interest bearing liabilities decreased to $74.3 million for the six months ended June 30, 2015 from $75.5 million for the six months ended June 30, 2014 a decrease of $1.2 million, or 1.6%. Net interest margin, calculated as annualized net interest income divided by average earning assets, decreased from 4.01% for the six months ended June 30, 2014 to 3.64% for the six months ended June 30, 2015, primarily due to a decrease in yield on earning assets from 4.33% to 4.00% between periods.

No provisions for loan losses were recognized for the six months ended June 30, 2015 compared to the reversal of provision of $30,000 for the six months ended June 30, 2014. The provision for loan losses is discussed further below under “Provision and Allowance for Loan Losses.”

For the six months ended June 30, 2015, noninterest income was $253,375 compared to $252,404 for the six months ended June 30, 2014, remaining relatively constant between comparable periods. Noninterest income for the six months ended June 30, 2015 and 2014 was derived from service charges on deposits, customer service fees, rental income, mortgage origination income and gains on the sale of loans held for sale. Increases in mortgage origination income, customer service fees and other income, as well as the recognition of gains on sales of investment securities were offset by the reduction in gain resulting from the sale of loans held for sale which were recognized in the prior year.

During the six months ended June 30, 2015, we incurred noninterest expenses of $3.7 million, compared to noninterest expenses of $5.6 million for the six months ended June 30, 2014, a decrease of $1.9 million, or 34.6%. This decrease in noninterest expenses resulted primarily from a decrease in product research and development expenses of $1.6 million and a decrease in real estate owned activity of $229,015. Compensation and benefits increased slightly by $34,084 due to the filling of vacancies at the Bank.

We recognized $5,080 in income tax expense for the six months ended June 30, 2015 due to our net operating income at the Bank. We did not recognize any income tax benefit for the six months ended June 30, 2014.

Assets and Liabilities

General

Total assets as of June 30, 2015 and December 31, 2014 were $104.4 million and $100.7 million, respectively, an increase of $3.7 million. Loans, net of allowance decreased $3.0 million due to loan repayments and transfers to other real estate owned during the quarter. Other real estate owned decreased $494,457 due to the sale of one property during the three months ended June 30, 2015 as well as due to the write down of one property during the quarter. Investment securities available for sale decreased $1.0 million as a result of $1.1 million in maturities and paydowns and $106,107 in amortization, partially offset by $300,000 in purchases and a $142,046 change in unrealized gains. Cash and cash equivalents decreased $179,503 and federal funds sold increased $8.4 million. At June 30, 2015, our total assets consisted principally of $5.1 million in cash and due from banks, $14.0 million in fed funds sold, $14.6 million in investment securities, $65.0 million in net loans, $2.3 million in property and equipment and $2.1 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 June 30, 2015 totaled $89.1 million, representing a decrease of approximately $2.2 million compared to December 31, 2014, and consisted principally of $87.6 million in deposits, $149,774 in a note payable and $1.3 in accounts payable and accrued expenses. At June 30, 2015, shareholders’ equity was $15.4 million compared to $9.4 million at December 31, 2014. Shareholders’ equity increased due to proceeds received from the Series A Private Placement, net of commissions and expenses, of $7.6 million and stock option expense of $191,695, partially offset by the recognition of net loss of $1.7 million and $141,451 in unrealized losses on investment securities available for sale.

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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 June 30, 2015, our gross loan portfolio consisted primarily of $31.4 million of commercial real estate loans, $16.7 million of commercial business loans, and $18.0 million of consumer and home equity loans. Our current loan portfolio composition is not materially different than the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our 2014 Form 10-K. We experienced net repayments of $2.7 million during the six months ended June 30, 2015 as a result of payoffs and repayments exceeding originations, while continuing to carefully consider liquidity needs and credit risk management.

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

      June 30, 2015       % of Total
Real estate:
       Commercial $        23,312,678 35.3 %
       Construction and development 8,078,943 12.2
       Single and multifamily residential 16,672,569 25.3
              Total real estate loans 48,064,190 72.8
Commercial business   16,710,759 25.3
Consumer 1,361,248 2.1
Deferred origination fees, net (135,602 ) (0.2 )
              Gross loans, net of deferred fees 66,000,595        100.0 %
Less allowance for loan losses (989,509 )
              Loans, net $ 65,011,086
 
December 31, 2014 % of Total
Real estate:
       Commercial $ 25,246,396 36.6 %
       Construction and development 8,425,453 12.2
       Single and multifamily residential 18,073,429 26.2
              Total real estate loans 51,745,278 75.0
Commercial business 16,059,082 23.2
Consumer 1,372,906 2.0
Deferred origination fees, net (149,823 ) (0.2 )
              Gross loans, net of deferred fees 69,027,443 100.0 %
Less allowance for loan losses (1,032,776 )
              Loans, net $ 67,994,667

The largest component of our loan portfolio at June 30, 2015 was $23.3 million of commercial real-estate loans, which represented 35.3% of the portfolio. The remainder of our loan portfolio consisted primarily of $16.7 million of single and multifamily residential loans, $8.1 million of construction and development loans, and $16.7 million of commercial business loans.

32



Loan Performance and Asset Quality

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

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

Refer to Note 5, Loans, for a table summarizing delinquencies and nonaccruals, by portfolio class, as of June 30, 2015 and December 31, 2014. Total delinquent and nonaccrual loans increased from $794,718 at December 31, 2014 to $2.8 million at June 30, 2015, an increase of $2.0 million, or 257.8%. This increase was a result of movement in several categories, including due to the transfer of one loan during the six months ended June 30, 2015. While past due loans increased, the increase was mainly attributable to one relationship. The Bank expects to settle this past due loan in the next quarter and does not expect that a loss will be incurred. At June 30, 2015, nonaccrual loans represented 0.5% of gross loans compared to 0.7% of gross loans as of December 31, 2014. Loans past due 30-89 days are considered potential problem loans and amounted to $2.5 million and $260,661 at June 30, 2015 and December 31, 2014.

Another method used to monitor the loan portfolio is credit grading. As part of the loan review process, loans are given individual credit grades, representing the risk we believe is associated with the loan balance. Credit grades are assigned based on factors that impact the collectability of the loan, the strength of the borrower, the type of collateral, and loan performance. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade. Refer to Note 5, Loans, for a table summarizing management’s internal credit risk grades, by portfolio class, as of June 30, 2015 and December 31, 2014.

Loans graded one through four are considered “pass” credits. At June 30, 2015, approximately 93% of the loan portfolio had a credit grade of “pass” compared to 95% at December 31, 2014. For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment. Consumer loans are assigned a “pass” credit rating unless something within the loan warrants a specific classification grade.

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 June 30, 2015, we had loans totaling $2.4 million on the watch list compared to $730,565 as of December 31, 2014, an increase of approximately $1.6 million or 221.7%. This increase in watch list loans was due to three loans being downgraded during the quarter.

33



Loans graded six or greater are considered classified credits. At June 30, 2015 and December 31, 2014, classified loans totaled $2.5 million and $2.7 million, respectively. The decrease in this category of $166,863, or 6.2%, during the six months ended June 30, 2015 is primarily due to one loan moving to other real estate owned for $300,000 which included a charge off of approximately $46,000 as well as $214,101 in loan paydowns and one loan being deemed impaired for $85,139. 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 June 30, 2015, impaired loans totaled $1.8 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 June 30, 2015, we had loans totaling approximately $782,000 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 June 30, 2015 and December 31, 2014.

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 June 30, 2015 and December 31, 2014, the principal balance of TDRs was approximately zero and $343,000, respectively. During this period, the principal balance of TDRs decreased to zero because the loan constituting our sole TDR was transferred to other real estate owned. As of June 30, 2014, the carrying balance of TDRs consisted of one performing loan for approximately $328,000, which was restructured and granted a period of interest only payments during January 2014. During the six months ended June 30, 2014, the two loans classified as held for sale and previously classified as TDRs were sold for total proceeds of $1,033,000. A success fee of approximately $41,000 and a gain of approximately $118,000 was recognized as a result of this sale.

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 June 30, 2015, the allowance for loan losses was $989,509, or 1.50% of gross loans, compared to $1.0 million at December 31, 2014, or 1.49% of gross loans. The allowance for loan losses decreased slightly due to one charge-off for approximately $46,000 which was recognized during the period.

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

Our allowance for loan losses consists of both specific and general reserve components. The specific reserve component relates to loans that are impaired loans as defined in FASB ASC Topic 310, “Receivables”. Loans determined to be impaired are excluded from the general reserve calculation described below and evaluated individually for impairment. Impaired loans totaled $1.7 million at June 30, 2015, with an associated specific reserve of $57,389. See Note 5, Loans, as well as the above discussion under “Loan Performance and Credit Quality” for additional information related to impaired loans.

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

Refer to Note 5, Loans, for a table summarizing activity related to our allowance for loan losses for the quarter ended June 30, 2015 and 2014, by portfolio segment. As of June 30, 2015, the allowance for loan losses was $989,509, or 1.50% of gross loans, compared to $1.0 million, or 1.49% of gross loans, as of December 31, 2014 and $1.1 million, or 1.71% of gross loans, as of June 30, 2014. We recognized a reversal of provision for loan losses of $30,000 for the six months ended June 30, 2014. We did not recognize a provision or reversal of provision for loan losses for the six months ended June 30, 2015. Charge-offs thus far in 2015 relate to the write-down of collateral to fair value, against specific reserves, at the time of repossession. The charge-offs during the six months ended June 30, 2014 related to three commercial loans and write-downs of collateral to fair value against specific reserves. Partial charge-offs were based on recent appraisals and evaluations on one residential loan and one construction and development loan in the process of foreclosure. Loans with partial charge-offs are typically considered impaired loans and may remain on nonaccrual status.

Other Real Estate Owned and Repossessed Assets

At June 30, 2015 and December 31, 2014, we had approximately $2.1 and $2.6 million in other real estate owned, respectively. During the six months ended June 30, 2015, we completed the sale of two parcels of real estate. The sale of those parcels of real estate resulted in a gain of approximately $11,938 and is included in the loss below. The following table summarizes changes in other real estate owned and repossessed assets for the six months ended June 30, 2015 and 2014:

      2015       2014
Balance at beginning of period $       2,557,457 $       2,508,170
Repossessed property acquired in settlement of loans 300,000 1,143,000
Proceeds from sales of repossessed property (582,295 ) (207,788 )
Loss on sale and write-downs of repossessed property, net (212,162 ) (408,092 )
Balance at end of period $ 2,063,000 $ 3,035,290

As of June 30, 2015, other real estate owned consisted of residential land lots valued at $44,100, commercial land valued at $1.0 million and commercial office space valued at $1.0 million. During 2014, other real estate owned for the Company increased due to the repossession of one property of $809,000, partially offset by the sale of real estate owned purchased from the Bank for proceeds of approximately $151,000, which resulted in losses of approximately $3,000 to the Company. In addition, the Company recognized write downs on real estate owned purchased from the Bank of approximately $579,000 during 2014. On March 18, 2015, proceeds of $452,593 were received from the sale of one piece of real estate which was used as collateral on the note payable. The full amount of proceeds was applied towards the remaining balance due on the note. On March 5, 2015, one nonaccrual loan at the Bank for $343,266 was transferred to other real estate owned for $300,000, net of a specific reserve, which includes $34,327 in selling costs, of $43,266. The specific reserve was included in the December 31, 2014 allowance amounts. On March 20, 2015, proceeds of $62,306 were received from the sale of one piece of real estate held by the Bank. No gains or losses were recognized as a result of this transaction. In March 2015, the Bank entered into a contract to sell one piece of real estate which it closed in April 2015. Proceeds of approximately $65,000 were received and a loss of approximately $5,200 was recognized as a result of this sale.

These assets are being actively marketed with the primary objective of liquidating the collateral at a level which most accurately approximates fair value and allows recovery of as much of the unpaid principal loan balance as possible upon the sale of the asset within a reasonable period of time. Based on currently available valuation information, the carrying value of these assets is believed to be representative of their fair value less estimated costs to sell, although there can be no assurance that the ultimate proceeds from the sale of these assets will be equal to or greater than their carrying values, particularly in the current real estate environment.

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Deposits

Our primary source of funds for loans and investments is our deposits. At June 30, 2015, we had $87.6 million in deposits, representing an increase of $4.8 million compared to December 31, 2014. Deposits at June 30, 2015 consisted primarily of $20.3 million in demand deposit accounts, $36.1 million in money market accounts and $31.2 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 74.2% and 82.0% at June 30, 2015 and December 31, 2014, respectively.

Borrowings

We use borrowings to fund growth of earning assets in excess of deposit growth. At June 30, 2015 and December 31, 2014, there were $33,432 and $153,603, respectively, in borrowings representing customer repurchase agreements.

Liquidity

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

The Company

The Company’s cash balances, independent of the Bank, were approximately $5.1 million and its real estate held for sale (which serves as collateral for the Company’s note payable) was $754,100 at June 30, 2015 compared to cash balances of approximately $288,000 and real estate held for sale of $1.2 million at December 31, 2014. The increase in liquid assets of approximately $4.3 million is due primarily to the receipt of cash proceeds of approximately $8,425,000 related to the Series A Private Placement, partially offset by the payment of commissions of 5% and due to expenses incurred related to the transaction services segment. In addition, the Company has payables due to unsecured vendors of $1.1 million and a note payable to a related party of $149,774 (secured by the real estate held for sale by the Company) which was advanced in September 2014. See “Note 8 – Business Segments”, and “Note 9 - Note Payable“ for additional information related to the transaction services segment and the related advance. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC as well as “Note 1 – Nature of Business and Basis of Presentation” and Management’s Discussion and Analysis in this Form 10-Q.

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

The Bank

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity at the Bank. We currently have $19.1 million in cash and fed funds sold. If our cash needs at the Bank exceed that, we plan to liquidate temporary investments and generate deposits within our market. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. Our investment securities available for sale at June 30, 2015 amounted to $14.6 million, or 14.2% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At June 30, 2015, $3.0 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.

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The Bank is a member of the FHLB, from which applications for borrowings can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB. At June 30, 2015, we had collateral that would support approximately $39.4 million in additional borrowings. We are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter.

The Bank also pledges collateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available credit under this program was $9.7 million as of June 30, 2015.

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

We believe our liquidity sources are adequate to meet our operating needs at the Bank. However, we continue to carefully focus on liquidity management during 2015. Comprehensive liquidity analyses serve management as vital decision-making tools by providing summaries of anticipated changes in loans, investments, core deposits, and wholesale funds. These internal funding reports provide management with the details critical to anticipate immediate and long-term cash requirements, such as expected deposit runoff, loan pay downs and amount and cost of available borrowing sources, including secured overnight federal funds lines with our various correspondent banks.

The Consolidated Company

The Company’s level of liquidity is measured by the cash, cash equivalents, and investment securities available for sale to total assets ratio and was 32.3% at June 30, 2015 compared to 26.3% as of December 31, 2014. The increase in liquidity is due primarily to the increase in cash and due from bank and fed funds sold, primarily due to the proceeds received from the Series A Private Placement.

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 June 30, 2015, we had issued commitments to extend credit of $10.0 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 increased from $9.4 million for December 31, 2014 to $15.4 million for June 30, 2015 due to the receipt of gross cash proceeds of approximately $8,425,000 related to the Series A Private Placement, net of the payment of commissions and expenses, and compensation expense related to stock options of $191,695, partially offset by the recognition of a net loss of $1.7 million and $141,451 of other comprehensive loss which consists exclusively of unrealized loss on investment securities available for sale. Due to regulatory restrictions, the Bank may not be a source of cash or capital for affiliates and may not be relied on as a source of financing. The foregoing discussion is a summary only and should be read in conjunction with the 2014 Form 10-K as filed with the SEC as well as “Note 1 – Nature of Business and Basis of Presentation” and Management’s Discussion and Analysis in this Form 10-Q.

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

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

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

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at June 30, 2015 and December 31, 2014.

To be well capitalized
under prompt
For capital adequacy corrective action
purposes provisions
Actual Minimum Minimum
    Amount     Ratio     Amount     Ratio     Amount     Ratio
As of June 30, 2015
       Total Capital (to risk
       weighted assets) $      11,184,000      15.1 % $      5,934,000      8.0 % $      7,417,000      10.0 %
       Tier 1 Capital (to risk
       weighted assets) 10,256,000 13.8 2,967,000 4.0 4,450,000 6.0
       Tier 1 Capital (to
       average assets) 10,256,000 10.6 3,872,000 4.0 4,839,000   5.0
       Common Equity Tier  
       1 Capital (to risk
       weighted assets) 10,256,000 13.8 2,967,000 4.5 4,450,000 4.5
 
As of December 31, 2014
       Total Capital (to risk
       weighted assets) $ 11,494,000 15.3 % $ 6,023,000 8.0 % $ 7,534,000 10.0 %
       Tier 1 Capital (to risk
       weighted assets) 10,551,000 14.5 3,014,000 4.0 4,521,000 6.0
       Tier 1 Capital (to
       average assets) 10,551,000 10.2 3,970,000 4.0 4,963,000 5.0
       Common Equity Tier
       1 Capital (to risk
       weighted assets) 10,551,000 14.0 3,014,000 4.5 4,521,000 4.5

38



Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not applicable

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

Not applicable

Item 3. Default Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

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

39



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: August 14, 2015 By:    /s/Gordon A. Baird  
Gordon A. Baird
Chief Executive Officer
(Principal Executive Officer)
 
 
By: /s/Martha L. Long
Martha L. Long
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)

40



EXHIBIT INDEX

Exhibit
Number       Description  
 
3.1 Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on May 15, 2015).
 
4.1 Certificate of Designations for the Series A Preferred Stock (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on May 15, 2015).
 
10.1 Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 15, 2015).
 
10.2 Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on May 15, 2015).
 
10.3 License Agreement between Independence Bancshares, Inc. and MPIB Holdings, LLC, dated May 14, 2015 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on May 15, 2015).
 
10.4 Form of Asset Purchase Agreement between Independence Bancshares, Inc. and MPIB Holdings, LLC (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on May 15, 2015).
 
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 June 30, 2015, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014, (iii) Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for six months ended June 30, 2015 and 2014, and (v) Notes to Consolidated Financial Statements