ITEM 1 - DESCRIPTION OF BUSINESS
General
Citizens Independent Bancorp, Inc. (“Bancorp”) was organized under the laws of the State of Ohio in 1994 to be the bank holding company for The Citizens Bank of Logan (“Citizens Bank” or “Bank”). As a bank holding company, Bancorp is subject to regulation by the Federal Reserve Bank of Cleveland (“FRB”). The FRB regulates the types of banking and nonbanking activities in which the Company may engage. At this time, the Company is not directly engaged in any permissible nonbanking activities. The term “Company” is used in this Form 10-K to refer to Bancorp and Citizens Bank, collectively.
Chartered in 1961, the Bank is an independent, community bank headquartered in Logan, Ohio, offering a broad range of financial services. The Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions (“DFI”).
The Bank operates through its home office, located at 188 West Main Street, Logan, Ohio 43138, and four other branch offices located in Athens and Hocking Counties in Ohio. We seek to deliver exceptional quality service while providing innovative products. Our priority has been, and continues to be, to create shareholder value by establishing an attractive commercial banking franchise and providing valuable service through relationship-oriented employees who are committed to the communities that we serve and to building lasting customer relationships.
During 2014, the Bank legally dissolved its two subsidiaries. Citizens Independent Mortgage Company, an Ohio corporation, and Citizens Travel Center LLC a travel agency organized as an Ohio limited liability company which was closed in 2013.
As of December 31, 2015, the Company had consolidated net assets of $183.8 million, total loans (net of allowance for loan losses, referred to as “net loans”) of $147.2 million, total deposits of $162.3 million, and shareholders’ equity of $17.4 million.
Primary Lines of Business
The Bank is a full service bank offering a wide variety of services to satisfy the needs of the consumer and commercial customers in our market area. Fundamental to our business are skilled bankers building full banking relationships with high quality customers. We believe that there is no substitute for knowing and understanding your customer when seeking attractive risk-adjusted returns in the extension of credit. We plan to continue to evaluate and adapt our services and product offerings as our customer base grows and the needs of the marketplace evolve.
The Bank currently offers banking services of traditional, independent community banks including demand deposit accounts, savings accounts, and certificates of deposit. The Bank’s loans are for any legitimate purpose, which includes commercial and industrial loans, real estate loans, including commercial income-producing real estate loans, construction and development loans, residential real estate loans, and consumer loans. Consumer loans offered include loans for the purpose of purchasing automobiles, recreational vehicles, personal residences, household goods, home improvements, or for educational needs. The Bank’s business is not seasonal in any material respect.
The principal risk associated with each category of loans we make is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower’s market or industry segment. Attributes of the relevant business market or industry segment include the competitive environment, customer and supplier power, threat of substitutes, and barriers to entry and exit. Our credit policy requires that key risks be identified and measured, documented and mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.
Our credit policy also provides detailed procedures for making loans to individuals along with the regulatory requirements to ensure that all loan applications are evaluated subject to our fair lending policy. Our credit policy addresses the common credit standards for making loans to individuals, the credit analysis and financial statement requirements, the collateral requirements, including insurance coverage where appropriate, as well as the documentation required. Our ability to analyze a borrower’s current financial health and credit history, as well as the value of collateral as a secondary source of repayment, when applicable, are significant factors in determining the creditworthiness of loans to individuals.
As of December 31, 2015, less than 3.0% of our total loan portfolio was unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing. As of December 31, 2015, approximately 33.0% of our total portfolio was fixed rate loans and approximately 67.0% of our total portfolio was variable rate loans.
Commercial and Industrial Loans. Our lending activities focus primarily on providing small and medium-sized businesses, agricultural businesses, and farms in our market area with commercial business loans. These loans are both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, equipment and machinery, lines of credit collateralized by inventory, and accounts receivable, as well as any other purposes considered appropriate by our executive management. For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash. Typically, we make equipment loans for a term of three to five years at fixed or variable interest rates with the loan amortized over the term. Equipment loans are generally secured by the financed equipment at advance ratios that we believe are appropriate for the equipment type.
In our credit underwriting process, we carefully evaluate the borrower’s industry, operating performance, liquidity, and financial condition. We underwrite credits based on multiple repayment sources, including operating cash flow, liquidation of collateral, and guarantor support, if any. As of December 31, 2015, approximately 78.5% of our commercial and industrial loans were secured and a significant portion of those loans were supported by personal guarantees. We closely monitor the operating performance, liquidity and financial condition of borrowers through analysis of periodic financial statements and meetings with the borrower’s management. As part of our credit underwriting process, we also review the borrower’s total debt obligations on a global basis.
Commercial Real Estate Loans. We make commercial real estate loans, or CRE loans, on income-producing properties. The primary collateral for CRE loans is a first lien mortgage on multi-family, office, warehouse, hotel, or retail property plus assignments of all leases related to the properties. Our CRE loans generally have maturity dates and amortization schedules of 15 to 25 years, nearly all with floating rates of interest. We seek to reduce the risks associated with commercial mortgage lending by focusing our lending in our target markets and obtaining financial statements, tax returns or both from borrowers and guarantors at regular intervals. In underwriting commercial real estate loans, we consider the borrower’s financial strength, cash flow, liquidity, and credit. In the event there is more than one borrower on the loan, we analyze global cash flow of all borrowers.
We also make construction and land development loans generally to local builders, developers, or persons who will ultimately not occupy the property being developed. We have no loans to national developers. Our construction and land development loans are intended to provide interim financing on the property and the principal amounts are based on percentages of the cost or as-completed appraised value of the property securing the loans. Additionally, when underwriting the loan, we consider the operating performance, liquidity, financial condition, and the reputation of the borrower and any guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates, and pre-construction sale information. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically does not exceed regulatory guidelines. Construction and land development loan funds are disbursed periodically at pre-specified stages of completion of construction and only after the project has been inspected by an experienced construction lender or third-party inspector. We carefully monitor these loans with on-site inspections and by closely monitoring disbursements.
CRE loans are secured by business and commercial properties. Typically our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. As of December 31, 2015, we had $69.3 million in CRE loans outstanding, comprising approximately 46.4% of our total loan portfolio. In line with our strategic direction, these loans were down from last year when they totaled $74.4 million, or 50.8%, of the loan portfolio.
Residential Real Estate Loans. Our lending activities include the origination of first and second lien loans secured by residential real estate that is located primarily in our target markets. These customers primarily include branch and retail banking customers. Typically our loan-to-value benchmark for these loans is below 90% at inception, with satisfactory debt-to-income ratios as well. As of December 31, 2015, we had a total of $43.4 million in outstanding residential real estate loans, comprising 29.1% of our total loan portfolio, up from $38.8 million, or 26.5% of the loan portfolio at December 31, 2014.
Personal Loans and Credit. We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats, and other recreational vehicles and the making of home improvements and personal investments. At December 31, 2015, we had $23.7 million in personal loans, which represented 15.9% of total loans. The December 31, 2014 loan portfolio had $19.7 million of personal loans, or 13.4% of the portfolio.
Deposit Generation. We generate deposits primarily through offering a broad array of deposit products to individuals, businesses, associations, financial institutions and government entities in our geographic market. We generally seek a full banking relationship from our lending customers. This often includes encouraging a new customer to consider both business and personal checking accounts and other deposit services. Our deposit services include checking, savings, and money market accounts, certificates of deposit, direct deposit services, and telephone and internet banking. As of December 31, 2015, the Bank had total deposits of $162.3 million.
Stock Offering
On October 25, 2013, we commenced an offering for the sale of up to 369,754 of our common shares, without par value, at a subscription price of $15.39 per share (up to $5,690,514), which subscription price was intended to be equal to 90% of the book value per share of the Company on September 30, 2013. This price was later amended to $14.49 per share. The offering had two components, a rights offering, which expired on January 31, 2014, followed by a public offering which expired on June 25, 2014.
Rights Offering
In the rights offering, for each of our common shares held by a shareholder on October 21, 2013, the record date of the rights offering, the shareholder received a subscription right to purchase one of our common shares at the $15.39 per share subscription price (later amended to $14.49 per share). In addition, for each two shares purchased by a shareholder in the rights offering, the Company issued to the shareholder, for no additional consideration, a warrant entitling the shareholder to purchase, upon exercise of the warrant, one additional common share. The exercise price of each warrant share is equal to 90% of the book value of a common share as reflected on the books of the Company on the last day of the month prior to the warrant exercise date. The warrant is exercisable until two years after the expiration date of the public offering, may be exercised only by payment of the warrant exercise price in cash and is non-transferable.
Public Offering
On February 1, 2014, following the expiration of the rights offering, the Company commenced the public offering of the common shares (and warrants) that were not subscribed for in the rights offering. The subscription price of the common shares, and the warrant terms, offered in the public offering were the same as those offered to the Company’s shareholders in the rights offering.
At the close of the public offering, the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants. As of March 18, 2016, 53,154 shares of common stock have been issued upon the exercise of warrants.
Employees
Bancorp does not have any employees. As of December 31, 2015, the Bank had 57 full-time employees and 3 part-time employees, a reduction of 5 FTE from the December 31, 2014 level. The future success of the Bank depends, in part, on its ability to attract, retain, and motivate highly qualified management and other personnel, for whom competition is intense. The Bank believes that its employees are critical to the success of the institution. The Bank provides group health, dental, life, and disability insurance for its employees. The Bank’s employees are not represented by a collective bargaining agreement and the Bank has never experienced a strike or similar work stoppage. The Bank considers its relationship with its employees to be satisfactory.
Market
We consider our primary market area to be Hocking and Athens Counties, Ohio. The Bank serves this market through four full service locations, which include the Bank’s main office located at 188 West Main Street, Logan, Hocking County, Ohio, and one limited service location. The principal economic activities in the Bank’s market area include manufacturing, the service sector for local universities, tourism, construction, healthcare, retailing, and food services.
Competition
Competition in originating non-residential mortgage and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors. The Bank has a significant market share of the lending markets in which it conducts operations.
Management believes that the Bank’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price, quality of customer service, and name recognition. The Bank’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. The Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.
Supervision and Regulation
Bancorp and the Bank are subject to extensive regulation by federal and state agencies. The regulation of bank holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the FDIC’s Deposit Insurance Fund and the banking system as a whole and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary, and other customers, as well as the FDIC’s Deposit Insurance Fund. They also may restrict Bancorp’s ability to repurchase its common shares or to receive dividends from the Bank and impose capital adequacy and liquidity requirements.
Bancorp is registered with the FRB as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a bank holding company, Bancorp is subject to regulation under the Bank Holding Company Act and to inspection, examination, and supervision by the FRB.
The Bank, as an Ohio commercial bank, is subject to regulation, supervision, and examination by the DFI and FDIC.
The following information describes selected federal and state statutory and regulatory provisions and is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by the United States Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to Bancorp and the Bank could have a material effect on their respective businesses.
Regulation of Bank Holding Companies. As a bank holding company, Bancorp’s activities are subject to extensive regulation by the FRB. Bancorp is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular examinations by the FRB.
The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to:
•assess civil money penalties;
•issue cease and desist or removal orders; and
•require that a bank holding company divest subsidiaries (including a subsidiary bank).
In general, the FRB may initiate enforcement actions for violations of laws and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company is expected to act as a source of financial strength to each subsidiary bank and to commit resources to support such subsidiary bank. Under this policy, the FRB may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders if the FRB believes the payment of such dividends would be an unsafe or unsound practice.
The Bank Holding Company Act requires the prior approval of the FRB in any case where a bank holding company proposes to:
•acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it;
•acquire all or substantially all of the assets of another bank or another financial or bank holding company; or
•merge or consolidate with any other financial or bank holding company.
The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits a qualifying bank holding company to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company. Bancorp is not a financial holding company.
Each subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act on the maintenance of reserves against deposits, extensions of credit to the bank holding company or any of its subsidiaries, investments in the shares or other securities of the bank holding company or its subsidiaries, and the taking of such shares or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property, or furnishing of any services. Various consumer laws and regulations also affect the operations of these subsidiaries.
Transactions with Affiliates, Directors, Executive Officers, and Shareholders. Sections 23A and 23B of the Federal Reserve Act and FRB Regulation W generally:
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate;
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates; and
•require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.
An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate, and other similar types of transactions.
A bank’s authority to extend credit to executive officers, directors, and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the FRB. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
Regulation of Ohio Banks. Regulation by the DFI affects the internal organization of Citizens Bank, as well as its depository, lending, and other investment activities. Periodic examinations by the DFI are usually conducted on a joint basis with the FDIC. Ohio law requires that Citizens Bank maintain federal deposit insurance as a condition of doing business. The ability of Ohio chartered banks to engage in certain state-authorized investments is subject to oversight and approval by the FDIC.
The ability of Citizens Bank to engage in any state-authorized activities or make any state-authorized investments, as principal, is limited if such activity is conducted or investment is made in a manner different than that permitted for, or subject to different terms and conditions than those imposed on national banks. Engaging as a principal in any such activity or investment not permissible for a national bank is subject to approval by the FDIC. Such approval will not be granted unless certain capital requirements are met and there is not a significant risk to the FDIC insurance fund. Most equity and real estate investments (excluding office space and other real estate owned) authorized by state law are not permitted for national banks. Certain exceptions are granted for activities deemed by the FRB to be closely related to banking and for FDIC-approved subsidiary activities.
Any mergers involving acquisitions of control of Ohio banks must be approved by the DFI. The DFI may initiate certain supervisory measures or formal enforcement actions against Ohio chartered banks. Ultimately, if the grounds provided by law exist, the DFI may place an Ohio chartered bank in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing banks, Citizens Bank is also governed by Ohio corporate law, to the extent such law does not conflict with the laws specifically governing banks.
Federal Deposit Insurance Corporation. The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the safety and soundness of the financial institution industry.
Insurance premiums for each insured depository institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium. An increase in the assessment rate could have a material adverse effect on the earnings of the affected institution(s), depending on the amount of the increase.
Insurance of deposits may be terminated by the FDIC upon a finding that the insured depository institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition enacted or imposed by the institution’s regulatory agency.
Regulatory Capital. The FRB has adopted risk-based capital guidelines for bank holding companies and state member banks. The Office of the Comptroller of the Currency (the “OCC”) and the FDIC have adopted risk-based capital guidelines for national banks and state non-member banks, respectively. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
Prior to January 1, 2015, the guidelines included a minimum for the ratio of total capital to risk-weighted assets of 8%, with at least half of the ratio composed of common shareholders’ equity, minority interests in certain equity accounts of consolidated subsidiaries and a limited amount of qualifying preferred stock and qualified trust preferred securities, less goodwill and certain other intangible assets (known as “Tier 1” risk-based capital). The guidelines also provided for a minimum ratio of Tier 1 capital to average assets, or “leverage ratio,” of 3% for bank holding companies that meet certain criteria, including having the highest regulatory rating, and 4% for all other bank holding companies.
The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”) in 1988. In 2004, the Basel Committee published a new capital adequacy framework (Basel II) for large, internationally active banking organizations, and in December 2010 and January 2011, the Basel Committee issued an update to Basel II (“Basel III”). The Basel Committee frameworks did not become applicable to banks supervised in the United States until adopted into United States law or regulations. Although the United States banking regulators imposed some of the Basel II and Basel III rules on banks with $250 billion or more in assets or $10 billion of on-balance sheet foreign exposure, it was not until July 2013 that the United States banking regulators issued final (or, in the case of the FDIC, interim final) new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including Bancorp and the Bank, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phase in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital will phase in from January 1, 2015, through January 1, 2019.
The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5 percent, (b) a Tier 1 capital ratio of at least 6.0 percent, rather than the former 4.0 percent, (c) a minimum total capital ratio that remains at 8.0 percent, and (d) a minimum leverage ratio of 4%.
Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.
The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions phase in from 2015 through 2019.
Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Some of the risk weightings were changed effective January 1, 2015.
The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, at .625%.
In addition to the capital adequacy requirements set forth above, every financial institution is classified into one of five categories based upon the institution’s capital ratios, the results of regulatory examinations of the institution and whether the institution is subject to enforcement agreements with its regulatory authorities. The categories are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A bank with a capital level that might qualify for well-capitalized or adequately-capitalized status may nevertheless be treated as though the bank is in the next lower capital category if the bank’s primary federal banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment. A bank’s operations can be significantly affected by its capital classification under the prompt corrective action rules. For example, a bank that is not well capitalized generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval. At each successively lower capital category, an insured depository institution is subject to additional restrictions. Undercapitalized banks are required to take specified actions to increase their capital or otherwise decrease the risk to the federal deposit insurance fund. Bank regulatory agencies generally are required to appoint a receiver or conservator within 90 days after a bank becomes critically undercapitalized.
Effective January 1, 2015, in order to be “well-capitalized,” a bank must have a common equity tier 1 capital ratio of at least 6.5%, a total capital ratio of at least 10%, a Tier 1 capital ratio of at least 8%, and a leverage capital ratio of at least 5%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level or any capital measure.
Dividends and Distributions. Shareholders of an Ohio corporation are entitled to dividends when, as, and if declared by the corporation’s board of directors. Bancorp’s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid by the Bank to Bancorp. Under Ohio law, a dividend may be declared by a bank from surplus, meaning additional paid-in capital, with the approval of the DFI and the holders of two-thirds of the bank’s outstanding shares. Superintendent approval is also necessary for payment of a dividend if the total of all cash dividends in a year exceeds the sum of (i) net income for the year and (ii) retained net income for the two preceding years. The FDIC also may restrict the Bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the payment of the dividend would constitute an unsafe and unsound practice.
The FRB expects Bancorp to serve as a source of strength to the Bank, which may require Bancorp to retain capital for further investment in the Bank rather than pay dividends to the Bancorp shareholders. The FRB has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that, as a matter of prudent banking, a bank holding company should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retentions appears to be consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Under certain circumstances, a bank holding company is required by such policy statement to provide advance notice to the FRB before paying a dividend.
Fiscal and Monetary Policies. The business and earnings of Bancorp and the Bank are affected significantly by the fiscal and monetary policies of the United States government and its agencies. Citizens Bank is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.
Privacy Provisions of Gramm-Leach-Bliley Act. Under the GLBA, federal banking regulators were required to adopt rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party.
Patriot Act. In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the United States government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. Title III of the Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions. Among other requirements, Title III and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures, and controls designed to detect and report suspicious activity. Citizens Bank has established policies and procedures that are believed to be compliant with the requirements of the Patriot Act.
Dodd-Frank Act. On July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act has significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion. Although many of the regulations have been adopted, some still have not, and the Bancorp is closely monitoring developments under the Dodd-Frank Act.
Among the provisions already implemented that have or may have an effect on Bancorp or the Bank are the following:
•the Consumer Financial Protection Bureau has been formed, which has broad powers to adopt and enforce consumer protection regulations;
•the federal law prohibiting the payment of interest on commercial demand deposit accounts was eliminated;
•the standard maximum amount of deposit insurance per customer was permanently increased to $250,000;
•the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average assets minus average tangible equity;
•public companies in all industries are now required to provide shareholders the opportunity to cast a non-binding advisory vote on executive compensation; and
•the FRB has imposed on financial institutions with assets of $10 billion or more a cap on the debit card interchange fees the financial institutions may charge. Although the cap is not applicable to Citizens Bank, it may have an adverse effect on the Bank as the debit cards issued by the Bank and other smaller banks, which have higher interchange fees, may become less competitive.
Additionally, it is expected that new corporate governance requirements applicable generally to all public companies in all industries will be adopted that require other new compensation practices and disclosure requirements, including requiring companies to “claw back” incentive compensation under certain circumstances, to consider the independence of compensation advisors and to make additional disclosures in proxy statements with respect to compensation matters.
As some provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and rule making, the full effect on Bancorp and the Bank cannot yet be determined. However, the implementation of certain provisions have already increased compliance costs and the implementation of future provisions will likely increase both compliance costs and fees paid to regulators, along with possibly restricting the operations of Bancorp and Citizens Bank.
Executive and Incentive Compensation. In June 2010, the FRB, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
Pursuant to the Joint Guidance, the FRB and FDIC will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as Bancorp and Citizens Bank. Such reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and prompt and effective measures are not being taken to correct the deficiencies.
Regulatory Matters. Under applicable laws, the FDIC and the DFI, as the Bank’s primary regulators, and the FRB, as Bancorp’s primary federal regulator, have the ability to impose substantial sanctions, restrictions, and requirements on us if they find, upon examination or otherwise, weaknesses with respect to our operations.
Based on the FDIC’s January 3, 2011 examination of Citizens Bank, the FDIC determined on May 3, 2011 that the Bank was in “troubled condition” within the meaning of federal statutes and regulations. As a result, certain limitations and regulatory requirements applied to the Bank, including but not limited to, prior approval of changes to senior executive management and directors and the payment of, or the agreement to pay, certain severance payments to officers, directors and employees. On June 11, 2011, the Bank entered into a Consent Order with the FDIC that was replaced by a revised Consent Order on October 23, 2012 (the “2012 Consent Order”). Further, the Bank entered into a written agreement with the DFI on July 6, 2011. This agreement was subsequently replaced with the DFI 2012 Agreement dated October 31, 2012 (the “DFI 2012 Agreement”). The 2012 Consent Order and DFI 2012 Agreement are nearly identical, and required the Bank to, among other things:
•obtain approval of the FDIC and DFI prior to appointment of any senior executive officer or new director;
•within 120 days, achieve and maintain Tier 1 Leverage Capital equal to at least 8.5% of total assets, and Total Risk Based Capital equal to at least 11.5% of risk-weighted assets;
•within 60 days, adopt and implement a written plan to reduce the loan concentration of credit identified in the examination of the Bank, and include procedures to restrict the creation of new concentrations and ensure that commercial unsecured lending does not exceed 80% of Tier 1 Capital and that total unsecured lending does not exceed 125% of Tier 1 Capital;
•not declare or pay any dividends without prior FDIC and DFI approval;
•not accept, renew, or rollover any brokered deposits without a specific waiver from the FDIC;
•within 60 days, eliminate and/or correct all violations of law, rule, and regulations identified in the examination and;
•provide the regulators with written progress reports within 30 days of the end of each calendar quarter while the 2012 Consent Order is effective detailing the results of actions taken to comply with the 2012 Consent Order.
On April 5, 2013, the Bank entered into a memorandum of understanding with the FDIC (the “FDIC 2013 MOU”), which required the Bank to address certain compliance issues.
On June 5, 2015, the FDIC 2013 MOU was terminated. Then, on October 2, 2015 both the 2012 Consent Order and the DFI 2012 Agreement were terminated by the FDIC and the DFI. As a result, the Bank is no longer considered to be in “troubled condition”. This means that the Bank is no longer required to seek FDIC or DFI approval prior to adding or replacing Board members or employing senior executive officers of the Bank and is not required to seek FDIC approval prior to entering into any employment agreements with those officers. The Bank is required to maintain Tier 1 leverage capital levels of 8.00% and to seek DFI and FDIC permission prior to the declaration or payment of any cash dividends.
In connection with the termination of the 2012 Consent Order and the DFI 2012 Agreement, the Bank entered into a Memorandum of Understanding with the FDIC and the DFI (the “2015 MOU”). The 2015 MOU requires, among other things, that the Bank maintain Leverage Capital of 8.0% and Total Capital of 11.50%, adopt strategic and profit plans, and revise its procedures related to managing sensitivity to interest rate risk. The Bank is currently in compliance with these requirements.
On July 5, 2011, the Company entered into a memorandum of understanding with the FRB (the “FRB 2011 MOU”). The FRB 2011 MOU prohibited the Company from:
•declaring or paying cash dividends without the prior written approval of the FRB;
•taking dividends or any other form of payment representing a reduction in the Bank’s capital without the prior written approval of the FRB;
•incurring, increasing, or guaranteeing any debt without the prior written approval of the FRB; or
•purchasing or redeeming any shares without the prior written approval of the FRB.
The FRB 2011 MOU remains in effect.
ITEM 1A
ITEM 1A - RISK FACTORS
The Company is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. These risks are not all inclusive. Additional risks and uncertainties that management is not aware, focused on, or currently deems immaterial may also impair the Company’s business operations. If any of the following risks occur, the Company’s financial condition could be materially and adversely affected.
Our capital levels may fall below the higher capital requirements required by the 2015 MOU.
Under the 2015 MOU, the Bank is required to maintain its Leverage Capital ratio at 8.0% and its Total Capital ratio at 11.5%. Although the Bank’s capital levels exceeded these requirements at December 31, 2015, these capital levels could change. Increases to our allowance for loan losses, additional deterioration of our real estate owned portfolio and operating losses could negatively impact our capital levels and make it more difficult to achieve the capital level directed by the FDIC and DFI. As a result, there is no assurance that we will not need to raise additional capital in the future to provide the capital required to meet the regulators’ requirements and provide liquidity for Bancorp.
If we raise additional capital by issuing equity securities, the percentage ownership of our existing shareholders may be reduced, and accordingly these shareholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common shares.
Debt financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, could increase our expenses and require that our assets be provided as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.
Governmental regulation and regulatory actions against us may further impair our operations or restrict our growth.
Bancorp is subject to significant governmental supervision and regulation. These regulations are intended primarily for the protection of depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Statutes and regulations affecting our business may be changed at any time and the interpretation of these statutes and regulations by examining authorities may also change.
There can be no assurance that such changes to the statutes and regulations or to their interpretation will not adversely affect our business. Such changes could subject us to additional costs, limit the types of financial services and products Bancorp may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act and regulations adopted under it constituted a major change in the financial services industry throughout the United States and have significantly impacted the way in which Bancorp and the Bank conduct business. Some provisions of the Dodd-Frank Act remain to be implemented and interpreted by the banking regulators and the SEC, and the full effect of that law is not yet known. Nonetheless, the parts of the law and regulations that have been implemented have already resulted in increased compliance costs and may result in increased fees paid to regulators, as well as restrictions on the operations of the Company, all of which may have a material adverse effect on the results of operations and financial condition of Bancorp.
If our allowance for loan losses is not sufficient to cover our actual loan losses, our ability to remain profitable will be adversely affected.
At December 31, 2015, our non-performing loans totaled $1.4 million, representing 0.9% of total loans and 0.7% of total assets. In addition, loans that management has classified as either substandard, doubtful or loss totaled $7.6 million, representing 5.1% of total loans and 4.1% of total assets. At December 31, 2015, our allowance for loan losses was $2.1 million, representing 153.9% of non-performing loans. In the event our loan customers do not repay their loans according to their terms and the collateral securing the payment of these loans is insufficient to pay any remaining loan balance, Bancorp may experience significant loan losses, which could have a materially adverse effect on our operating results. Bancorp makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, Bancorp reviews loans and our loss and delinquency experience, and evaluates economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable losses in our loan portfolio, resulting in additions to our allowance. The additions to our allowance for loan losses would be made through increased provision for loan losses, which would reduce our income.
Bank regulators periodically review Citizens Bank’s allowance for loan losses and may require it to increase the allowance for loan losses. Any increase in the allowance for loan losses as required by these regulatory authorities could have a material adverse effect on Bancorp’s results of operations and financial condition.
A large percentage of our loans are collateralized by real estate, and deterioration in the real estate market may result in additional losses and adversely affect our financial results.
Our results of operations have been, and in future periods will continue to be significantly impacted by the economy in Ohio.
Deterioration of the economic environment Bancorp is exposed to, including a continued decline or worsening declines in the real estate market and single-family home re-sales or a material external shock, may significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. In the event of a default with respect to any of these loans, amounts received upon sale of the collateral may be insufficient to recover outstanding principal and interest on the loan. In the past, material declines in the value of the real estate assets securing many of our commercial real estate loans led to significant credit losses in the portfolio.
The same deterioration noted above can affect our real estate owned portfolio, and if the economic environment declines, it could significantly impair the value of the portfolio and our ability to sell the properties in a timely manner.
Changes in economic and political conditions could adversely affect Bancorp’s earnings through declines in deposits, loan demand, the ability of its customers to repay loans and the value of the collateral securing its loans.
Bancorp’s success depends, in part, on economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy and other factors beyond Bancorp’s control may adversely affect its deposit levels and composition, demand for loans, the ability of its borrowers to repay their loans and the value of the collateral securing the loans it makes. Economic turmoil in Europe and Asia and changes in oil production in the Middle East affect the economy and stock prices in the United States, which can affect Bancorp’s earnings and capital and the ability of its customers to repay loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and Bancorp’s ability to sell the collateral upon foreclosure.
Volatility in the economy may negatively impact the fair value of our shares.
The market price for Bancorp’s common shares has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future, including:
•announcements of developments related to our business;
•fluctuations in our results of operations;
•sales of substantial amounts of our securities into the marketplace;
•general conditions in our markets or the worldwide economy;
•a shortfall in revenues or earnings compared to securities analysts’ expectations;
•our inability to pay cash dividends;
•changes in analysts’ recommendations or projections; and
•our announcement of other projects.
Changes in interest rates could adversely affect our financial condition and results of operations.
Our results of operations depend substantially on our net interest income, which is the difference between (i) interest income on interest-earning assets, principally loans and investment securities, and (ii) interest expense on deposit accounts and borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, money supply, and the policies of various governmental and regulatory authorities. While Bancorp has taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.
Increases in interest rates can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. Bancorp originates loans for sale and for our portfolio. Increasing interest rates may reduce the volume of origination of loans for sale and consequently the volume of fee income earned on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and leases, resulting in an increase in non-performing assets and a reduction of income recognized.
We rely, in part, on external financing to fund our operations and the availability of such funds in the future could adversely impact its growth strategy and prospects.
The Bank relies on deposits, advances from the FHLB, and other borrowings to fund its operations. Although the Company considers such sources of funds adequate for its current capital needs, the Company may seek additional debt or equity capital in the future to achieve its long-term business objectives. The sale of equity or convertible debt securities in the future may be dilutive to the Company shareholders, and debt refinancing arrangements may require the Company to pledge some of its assets and enter into covenants that would restrict its ability to incur further indebtedness. Additional financing sources, if sought, might be unavailable to Bancorp or, if available, could be on terms unfavorable to it. If additional financing sources are unavailable, not available on reasonable terms or the Company is unable to obtain any required regulatory approval for additional debt, the Company’s growth strategy and future prospects could be adversely impacted.
Credit risks could adversely affect our results of operations.
There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay outstanding loans or that the value of the collateral securing loans may decrease. Bancorp extends credit to a variety of customers based on internally set standards and judgment. Bancorp attempts to manage credit risk through a program of underwriting standards, the review of certain credit decisions, and an on-going process of assessment of the quality of the credit already extended. However, conditions such as inflation, recession, unemployment, changes in interest rates, money supply, and other factors beyond our control may increase our credit risk. Such adverse changes in the economy may have a negative impact on the ability of borrowers to repay their loans. Because Bancorp has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. In addition, substantially all of our loans are to individuals and businesses in Ohio. Consequently, any decline in the economy of this market area could have a materially adverse effect on our financial condition and results of operations.
We operate in extremely competitive markets, and our business will suffer if we are unable to compete effectively.
In our market area, the Company encounters significant competition from other commercial banks, savings associations, savings banks, insurance companies, consumer finance companies, credit unions, other lenders and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The increasingly competitive environment is a result primarily of changes in regulation and the accelerating pace of consolidation among financial service providers. Many of our competitors have substantially greater resources and lending limits than the Company does and may offer services that the Company does not or cannot provide.
The preparation of financial statements requires management to make estimates about matters that are inherently uncertain.
Management’s accounting policies and methods are fundamental to how the Company records and reports our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. The most critical estimates are the level of the allowance of loan losses, other real estate owned valuation, and the valuation allowance on the deferred tax asset. Due to the inherent nature of these estimates, Bancorp cannot provide absolute assurance that it will not significantly adjust the allowance for loan losses or valuations due to uncertainties.
Our organizational documents may have the effect of discouraging a third party from acquiring us.
Our articles of incorporation and code of regulations, as amended, contain provisions that make it more difficult for a third party to gain control over or acquire us. The current provisions that may have anti-takeover effects include: (a) the elimination of cumulative voting in the election of directors; (b) the requirement that shareholder nominations for election to the Board of Directors be made in writing and delivered or mailed to the president of the Company within specified time frames; (c) the requirement that directors may be removed only by the affirmative vote of holders of not less than 80% of the voting power of the Company entitled to vote at an election of directors; (d) the requirements that certain business combinations be approved by at least 80% of the voting power of the Company, depending on the nature of the recommendation of the Board of Directors with regard to the relevant acquisition; (e) the lack of a provision opting out of application of the Ohio Merger Moratorium statute and its restrictions on persons who become the beneficial owner of ten percent or more of the shares of the Company and; (f) the classification of the Board of Directors into three classes with staggered terms. These provisions of our governing documents may have the effect of delaying, deferring, or preventing a transaction or a change in control that might be in the best interest of our shareholders.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to utilize alternative methods to complete financial transactions that historically have involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
We may be named as a defendant from time to time in a variety of litigation and other actions.
Bancorp or its subsidiary may be named as a defendant from time to time in a variety of litigation arising in the ordinary course of their respective businesses. Such litigation is normally covered by errors and omissions or other appropriate insurance. However, significant litigation could cause the Company to devote substantial time and resources to defending its business or result in judgments or settlements that exceed insurance coverage, which could have a material adverse effect on the Company’s financial condition and results of operation. Further, any claims asserted against Bancorp or Citizens Bank, regardless of merit or eventual outcome may harm the Company’s reputation and result in loss of business. In addition, the Company may not be able to obtain new or different insurance coverage, or adequate replacement policies with acceptable terms.
Our ability to use net operating loss carry forwards to reduce future tax payments may be limited or restricted.
Bancorp has generated net operating losses (“NOLs”) as a result of our recent losses. Bancorp generally is able to carry NOLs forward to reduce taxable income in future years. However, our ability to utilize the NOLs is subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change generally occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, (directly, indirectly, or constructively under Section 382 and the Treasury regulations) 5% or more of a corporation’s common shares or are otherwise treated as 5% shareholders under Section 382 and the Treasury regulations caused an increase in their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the shares owned by these shareholders over a three-year rolling period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carry forwards. This annual limitation is generally equal to the product of the value of the corporation’s shares on the date of the ownership, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carry forwards.
Bancorp cannot ensure that our ability to use our NOLs to offset income will not become limited in the future. As a result, Bancorp could pay taxes earlier and in larger amounts than would be the case if our NOLs were available to reduce our federal income taxes without restriction.
Potential misuse of funds or information by the Bank’s employees or by third parties could result in damage to our customers for which we could be held liable, subject the Company to regulatory sanctions and otherwise adversely affect our financial condition and results of operations.
Our employees handle a significant amount of funds, as well as financial and personal information. Although the Company has implemented systems to minimize the risk of fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be adequate or that a taking or misuse of funds or information by employees, by third parties who have authorized access to funds or information, or by third parties who are able to access funds or information without authorization will never occur. We could be held liable for such an event and could also be subject to regulatory sanctions. We could also incur the expense of developing additional controls to prevent future such occurrences. Although the Company has insurance to cover such potential losses, we cannot provide assurance that such insurance will be adequate to meet any liability. In addition, any loss of trust or confidence placed in the Company by our clients could result in a loss of business, which could adversely affect our financial condition and results of operations.
The Company could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, our computer systems.
The Bank relies heavily on information systems to conduct our business and to process, record, and monitor transactions. Risks to the system result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, in recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. We are also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which we deal.
Potential adverse consequences of attacks on the Company’s computer systems or other threats include damage to our reputation, loss of customer business, litigation and increased regulatory scrutiny, which might also result in financial loss and require additional efforts and expense to attempt to prevent such adverse consequences in the future.
The absence of a trading market in our common shares may adversely affect your ability to resell shares at prices that you find attractive, or at all.
Our common shares are not traded on any national securities exchange and are not quoted on any over-the-counter market, and we do not intend to apply for listing on any national securities exchange or stock market. In the absence of a trading market, investors may be unable to liquidate their investment or make any profit from the investment. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.
Our ability to pay cash dividends is subject to prior FRB approval.
The FRB 2011 MOU prohibits the Company from paying dividends without the FRB’s prior approval. Bancorp does not know how long this restriction will remain in place. Even if Bancorp is permitted to pay a dividend, Bancorp is dependent primarily upon the earnings of Citizens Bank for funds to pay dividends on our common shares. The payment of dividends by Citizens Bank is subject to certain regulatory restrictions. In addition, federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter, and or, continue to be undercapitalized. As a result, any payment of dividends in the future by Bancorp will be dependent, in large part, on Citizens Bank’s ability to satisfy these regulatory restrictions and our subsidiary’s earnings, capital requirements, financial condition, and other factors.
We may issue additional common shares or convertible securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per common share and adversely affect the terms on which we may obtain additional capital.
Our authorized capital includes 2,000,000 common shares and 100,000 preferred shares. As of December 31, 2015, we had 667,618 common shares and no preferred shares outstanding. We may issue up to 67,985 additional common shares through the exercise of warrants issued in the 2014 stock offering. Although we presently do not have any intention of issuing additional common shares (other than pursuant to the exercise of warrants issued in the stock offering), we may do so in the future in order to meet our capital needs and regulatory requirements, and we may be able to do so without shareholder approval. Our Board of Directors generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized, but unissued, common shares for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. We plan no immediate activity. Any issuance of additional common shares or convertible securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per common share.
ITEM 1B.
ITEM 1B. - UNRESOLVED STAFF COMMENTS
No response required.
ITEM 2
ITEM 2 - PROPERTIES
The Company conducts business from five office locations. The Bank’s main office is located at 188 West Main Street, Logan, Ohio 43138. The main office is housed in a Bank-owned 4,000+ square foot building with drive-up lanes and a detached ATM. The Bank’s offices are located in Logan, Ohio (main office and 2 branches), Athens, Ohio (1 branch), and Nelsonville, Ohio (1 branch). The Company currently operates from the following locations, which, unless otherwise indicated, are owned by the Bank:
In September, 2015 an in-store, limited service, bank branch in Athens, Ohio was closed. Analysis indicated that this particular location was not profitable and bank resources could be better deployed elsewhere. Incremental cost savings more than offset the costs of the lease buyout.
Management is pursuing the merger of the two leased branches in Logan into a newly constructed, bank owned, branch in Logan. Management believes that the site of the new branch is highly advantageous in comparison to the two branches to be replaced, will result in significantly reduced costs, and will enhance the business model. Cost reductions resulting from lower maintenance, energy expenses, and personnel costs make the project accretive to earnings.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation that arises in the normal course of business. However, neither Bancorp nor the Bank is currently involved in any litigation that management believes, either singularly or in the aggregate, could be reasonably expected to have a material adverse effect on its business, financial condition or results of operation.
ITEM 4
ITEM 4 - Mine Safety Disclosures
Not applicable.
Part II
ITEM 5
ITEM 5 - Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
There is no market for our securities. Our securities are not sold on any exchange or listed on any securities listing venue. The number of record holders of the Company’s common stock as of December 31, 2015 is 659.
The last cash dividend was paid in December 2010. Our shareholders are entitled to receive distributions out of legally available funds as and when declared by the Board, in its sole discretion. See Item 1 - Description of Business - “Regulatory Matters” for a description of restrictions on the Company’s ability to pay dividends.
Recent Sales of Unregistered Securities. On February 9, 2015, the Bancorp renegotiated a portion of a $5.0 million note payable due December 29, 2015. In exchange for $2.3 million of the original $5.0 million note, the Company issued an interest only note for $1,644,546.60, due August 4, 2021, with a fixed interest rate of 6.00% and 28,675 shares of the Company’s common stock. These common shares were offered and sold by Bancorp in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On July 10, 2015, the Bancorp entered into an agreement with an accredited investor to sell that investor 4,500 shares of Bancorp common stock at a per share price of $25.46. These common shares were offered and sold by Bancorp in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Statements
Certain statements in this Form 10-K, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”, “estimates”, “may”, “feels”, “expects”, “believes”, “plans”, “will”, “would”, “should”, “could”, and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such a difference include, but are not limited to:
·the success, impact, and timing of the implementation of the Company’s business strategies, including the successful integration of the recently completed acquisitions, the expansion of consumer lending activity, and rebranding efforts;
·competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and the Company’s ability to attract, develop, and retain qualified professionals;
·changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S. government and FRB, which may adversely impact interest margins;
·changes in prepayment speeds, loan originations, and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated;
·adverse changes in the economic conditions and/or activities, including impacts from the implementation of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, as well as continuing economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults;
·legislative or regulatory changes or actions, including in particular the Dodd-Frank Act and the regulations promulgated and to be promulgated thereunder by the FDIC, the FRB and others, that may subject the Company to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses;
·deterioration in the credit quality of the Company’s loan portfolio, which may adversely impact the provision for loan losses;
·changes in accounting standards, policies, estimates, or procedures, which may adversely affect the Company’s reported financial condition or results of operations;
·adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within the Company’s investment portfolio and interest rate sensitivity of the Company’s consolidated balance sheet;
·Bancorp’s ability to receive dividends from its subsidiary;
·the Company’s ability to maintain required capital levels and adequate sources of funding and liquidity;
·the impact of larger or similar sized financial institutions encountering problems, which may adversely affect the banking industry and/or the Company’s business generation and retention, funding, and liquidity;
·the costs and effects of regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations;
·the Company’s ability to secure confidential information through the use of computer systems and telecommunications networks, including those of the Company’s third-party vendors and other service providers, may prove inadequate, which could adversely affect customer confidence in the Company and/or result in the Company incurring a financial loss;
·the overall adequacy of the Company’s risk management program; and
·other risk factors relating to the banking industry or the Company as detailed from time to time in the Company’s reports filed with the SEC, including those risk factors included in the disclosure under "ITEM 1A - RISK FACTORS" of this Form 10-K.
All forward-looking statements speak only as of the filing date of this Form 10-K and are expressly qualified in their entirety by the cautionary statements. Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Bancorp’s business and operations, it is possible that actual results may differ materially from these projections. Additionally, Bancorp undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-K or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements. Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Bancorp’s website - www.tcbol.com under the “About Us” section.
The following discussion and analysis of the Company’s Consolidated Financial Statements is presented to provide insight into management's assessment of the financial results and condition for the periods presented. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, as well as the ratios and statistics, contained elsewhere in this Form 10-K.
Overview. The Company’s profitability, as with most financial institutions, is significantly dependent upon net interest income, which is the difference between interest received on interest earning assets, such as loans and securities, and the interest paid on interest bearing liabilities, principally deposits and borrowings. During a period of economic slowdown, the lack of interest income from nonperforming assets and additional provision for loan losses can greatly reduce profitability. Results of operations are also impacted by noninterest income, such as service charges on deposit accounts and fees on other services, income from lending services, as well as noninterest expense such as salaries and employee benefits, occupancy expense, professional and other services, and other expenses.
For the year ended December 31, 2015, the Company recorded net income of $0.7 million or $1.01 per share, compared to net income of $6.1 million or $11.21 per share as of December 31, 2014. Return on average assets and return on average common equity were 0.34% and 3.93%, respectively, for year-end 2015, compared to 3.00% and 64.11% for year-end 2014. The results for 2014 include the reversal of the previously recorded deferred tax asset allowance, resulting in an income tax benefit of $5.1 million in 2014 net income. Adjusting for the effects of the deferred tax asset allowance reversal, the normalized 2014 return on average assets and return on average common equity would be 0.48% and 10.33% respectively.
Profitability in 2015 was largely the result of diligent loan monitoring and the application of enhanced credit review. Many of the lower credit quality loans made in prior years have been returned to current status, been foreclosed and the collateral liquidated, or refinanced elsewhere. Aggressive stewardship of those loans in the prior year resulted in higher costs for that period, but those credit related costs continued to moderate in 2015. The prior year’s results were impacted by costs associated with the declining credit quality of loans originated over a six year period beginning in 2003 and emanated from large commercial loans to industries, including horticulture nurseries, biofuel production, and speculative commercial real estate. Several loans were made to borrowers outside the Company’s primary footprint. Of the $1.7 million of gross charge offs during 2015, 36.5% came from large commercial loans originated prior to 2009.
Key items affecting the Company’s results in 2015 compared to 2014 include:
•The Company recorded income tax expense of $232 thousand in 2015. In 2014, the Company reversed the 2012 write-off of deferred tax assets as the financial projections indicated that we were “more likely than not” able to utilize those deferred tax assets going forward. The net effect of this reversal of the deferred tax asset allowance was a $5.1 million addition to income.
•The Company recaptured $250 thousand from the allowance for loan and lease losses (“ALLL”) compared to the recapture of $186 thousand in 2014 and made valuation adjustments totaling $138 thousand to the other real estate owned (“OREO”) portfolio during 2015 compared to $127 thousand of OREO portfolio valuation adjustments in 2014. During 2015, net loan charge offs totaled $1.5 million versus the $0.3 million of 2014. Principal transfers to OREO totaled $150 thousand in 2015 versus $803 thousand in 2014.
•Net interest income increased $128 thousand or 1.88% to $6.9 million for the year ended December 31, 2015 from $6.8 million for the year ended December 31, 2014. A $0.3 million year-over-year decline in interest income was offset by a $0.4 million reduction in interest expense.
•The Company’s capital position increased with the capital campaign as well as the profitability of 2015. Shareholders’ equity at Bancorp increased $2.5 million (17.00%) to $17.4 million on December 31, 2015 from $14.8 million on December 31, 2014. Leverage capital and total capital at the Bank were 8.23% and 13.14% as of December 31, 2015 compared to 8.11% and 13.39% as of December 31, 2014. Refer to Item 1 “Supervision and Regulation” for further discussion of the 2012 Consent Order.
Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014
For the year ended December 31, 2015, the Company recorded net profit of $0.7 million, or $1.01 per share, a decline of $5.4 million from the net profit of $6.1 million, or $11.21 per share, for the year ended December 31, 2014. The 2014 net income results were buoyed by the recapture of the $5.1 million deferred tax allowance account. Adjusting for this recapture, normalized 2014 net income after tax would be $1.0 million, essentially flat with 2015 net income. Improved profitability in 2015 can primarily be attributed to better loan quality, reducing non-accrual loans by $6.4 million, and allowing a $250 thousand recapture of the allowance for loan losses, and a reduction of $0.4 million in interest expense. These reductions in loan credit related expense more than offset the $0.2 million reduction in noninterest income.
Distribution of Assets, Liabilities, and Shareholders' Equity
For the years ended December 31,
(1) Loan fees are immaterial amounts
(2) Non-accrual loans are included in average loan balance
(3) Interest income for tax-exempt securities is not calculated on a tax-exempt basis
Volume and Rate Analysis
2015 Compared to 2014
Interest income for the year ended December 31, 2015 was $8.2 million, a $0.3 million, or 3.3%, decrease from the $8.5 million earned during the year ended December 31, 2014. The yield on earning assets increased 29 basis points (bps) to 4.73% for the year ending December 31, 2015 from 4.44% for the prior year ended December 31, 2014. Interest income earned from the loan portfolio increased approximately $0.1 million when compared to 2014. The small increase in interest income from the loan portfolio can be attributed to both the $6.4 million decrease in non-accrual loans and an increase in average loans year-over-year of $2.1 million (1.5%) reduced by a 2 bps decrease in the yield on those loans. The yield on earning assets was impacted by the sales, payoffs, and maturities within the securities portfolio reducing the share of these relatively low yielding assets from 17.5% to 8.4% of earning assets.
Interest income from the investment portfolio was down $0.4 million for the years ended December 31, 2015 and 2014. A year-over-year decline of $20.3 million (55.8%) in the average investment portfolio was offset by a year-over-year increase in average yield of 23 bps (from 1.93% in 2014 to 2.16% in 2015). A total of $3.1 million of investment securities were purchased in 2015, consisting of $1.8 million of municipal securities, yielding 1.88%, and $1.3 million of US government federal agencies, yielding 2.02%. During 2014, management invested in $5.0 million of US Treasury obligations with an average yield of 1.26%.
Interest expense for the year ended December 31, 2015 was $1.2 million, a $0.4 million or 25.0% decrease from the $1.6 million paid for the year ended December 31, 2014. Interest expense for deposits declined $0.3 million to $0.9 million for 2015 from $1.2 million for 2014. The decrease resulted, in part, from a new pricing strategy of setting competitive deposit rates on retail CD’s (less than $100 thousand) but not being the market leader as had been the case in prior years. This strategy, in part, has contributed to a $14.6 million (18.3%) decrease in the average balance of certificates of deposit year-over-year.
Interest expense for other borrowings was $334 thousand in 2015 and $456 thousand in 2014. All of the 2015 interest expense related to loans to the holding company totaling $2.6 million as of December 31, 2015 and $6.1 million as of December 31, 2014. Please refer to “Other Borrowings” below for details regarding these loans.
Provision for Loan Losses. The Company establishes an allowance for loan losses through charges to earnings, which are shown in the consolidated statements of income as the provision for loan losses. Through the provision for loan losses, an allowance is maintained that reflects management’s best estimate of probable incurred loan losses related to specifically identified loans as well as the inherent risk of loss related to the remaining portfolio. In evaluating the allowance for loan losses, management considers various factors that include loan growth, the amount and composition of the loan portfolio, (including non-performing and potential problem loans), diversification, or conversely, concentrations by industry, geography, or collateral within the portfolio, historical loan loss experience, current delinquency levels, the estimated value of the underlying collateral, prevailing economic conditions, and other relevant factors. Loan charge-offs are recorded to this allowance when loans are deemed uncollectible, in whole or in part. Impacting the provision for loan losses in any accounting period are several factors including the amount of loan growth during the period, broken down by loan type, the level of charge-offs during the period, the changes in the amount of impaired loans, changes in risk ratings assigned to loans, specific loan impairments, credit quality, and ultimately, the results of management’s assessment of the inherent risks of the loan portfolio.
At December 31, 2015, the Company determined that an excess existed in the allowance for loan and lease losses and $250 thousand was recaptured to income. Predictive indicators, such as the Watch List and its component subcategories, are the principal credit tool used by the Bank to identify future problem loans. Special Mention loans, those loans deemed to be of higher risk or with correctable deficiencies, declined by $3.8 million or 69.8% at December 31, 2015 relative to December 31, 2014. Substandard loans, those loans in which there is the distinct possibility of sustaining some loss, dropped $1.4 million, or 15.7% from December 31, 2014 to December 31, 2015. There were no doubtful loans, those for which full collection is doubtful, at December 31, 2015 compared to $0.7 million at December 31, 2014. Watch List loans, those loans rated Special Mention, Substandard, or Doubtful declined $5.9 million, or 39.0%, from $15.2 million at December 31, 2014 to $9.2 million at December 31, 2015.
This decision to recapture the calculated excess portion of the allowance for loan and lease losses is further bolstered by year end delinquency numbers. At December 31, 2015 nonperforming loans had fallen $6.4 million from the December 31, 2014 level of $7.7 million to $1.4 million.
The $250 thousand negative provision in 2015 compares to the recovered provision of $186 thousand in 2014. The reduction in provision for loan losses was largely driven by a decrease in nonperforming loans and increases in the collateral values for impaired loans. Management considers the allowance for loan losses at December 31, 2015 adequate to cover loan losses based on its assessment of various factors affecting the loan portfolio, including the level of problem loans, overall delinquencies, business conditions, estimated collateral values, and loss experience. A further decline in local and national economic conditions, or other factors, could result in a material increase in the allowance for loan losses which could adversely affect the Company’s financial condition and results of operations.
Noninterest Income. Noninterest income, which consists primarily of fees and commissions earned on services that are provided to the Company’s banking customers, and to a lesser extent, gains on sales of OREO and other repossessed assets, and other miscellaneous income, decreased $237 thousand, or 13.7%, to $1.5 million for the year ended December 31, 2015 from $1.7 million for the year ended December 31, 2014. The decrease can mostly be attributed to 2014 gains from the sales of repossessed assets of $464 thousand as well as higher gains on the sale of securities in 2014. The following is a discussion of significant year-over-year changes in other material non-interest income categories:
•Services charges for deposit accounts decreased by $42 thousand, or 9.3%, to $409 thousand for the year ended December 31, 2015 from $451 thousand for the year ended December 31, 2014. These fees were expected to decline as the Bank changed the procedure used to process account overdrafts to a more customer based methodology, limiting the number of overdrafts per customer.
•The Company recorded $28 thousand in secondary market sales fees as the initiative to originate loans and sell them in the secondary markets came on line in late 2015. There was no income from the sale of loans held for sale during the year ended December 31, 2014.
•Income for credit and debit cards increased by $11 thousand, or 3.2%, to $350 for the year ended December 31, 2015 from $339 thousand for the year ended December 31, 2014. The Bank has placed a heightened emphasis on credit and merchant card issuance and fees.
•Other noninterest income from the gain on sale of OREO properties decreased by $219 thousand to $245 thousand for the year ended December 31, 2015 from a gain of $464 thousand for the year ended December 31, 2014. Much of this difference was attributable to a single relationship in 2014 which generated a gain of $286 thousand.
•Other noninterest income was up $19 thousand, or 7.0%, to $291 thousand for the year ended December 31, 2015 from $272 thousand for the year ended December 31, 2014. Noninterest income primarily increased due to mortgage broker sales commissions and increase in cash surrender value of bank owned life insurance.
Noninterest Expense. Noninterest expense, which consists primarily of personnel, occupancy, equipment and other operating expenses, increased by $48 thousand, or 0.6%, to $7.8 million for the year ended December 31, 2015 matching the $7.8 million in expense for the year ended December 31, 2014. The year-over-year increase was realized in compensation expense (down $218 thousand) and other occupancy expenses (down $119 thousand) offset by higher expenses associated with fixed asset write-downs ($348 thousand) and other miscellaneous expenses.
The following is a discussion of significant year-over-year changes for other material non-interest expense categories:
•Salary and benefit expense declined by $0.2 million, or 6.4%, to $3.2 million for the year ended December 31, 2015 from $3.4 million for the year ended December 31, 2014. Employee health insurance premiums were $156 thousand less for calendar year 2015 relative to calendar year 2014 due to changes made in both the coverages offered and carrier. Reductions in salary expense were a result of the full year effect of staff reductions made in 2014.
•FDIC insurance premium expense fell by $159 thousand, or 39.7%, to $242 thousand as of December 31, 2015 from $401 thousand of December 31, 2014. The 2015 FDIC insurance expense was less as a result of a reduction in the risk premium paid by the Bank and the strategic contraction of the Bank.
•Expenses associated with OREO properties decreased by $85 thousand, or 27.6%, for the year ended December 31, 2015 relative to the year ended December 31, 2014. Costs related to the preservation and care of OREO properties dropped as a result of a decline in the number and value of OREO properties held by the Bank. At December 31, 2015 the Bank held OREO property valued at $0.2 million versus properties valued at $1.1 million at December 31, 2014. In 2015, $138 thousand was required to write-down existing OREO properties to market value versus a expense of $127 thousand in 2014.
•Legal and other professional expense increased by $125 thousand, or 28.8%, to $559 thousand as of December 31, 2015 from $434 thousand as of December 31, 2014. The increase can be attributed to the increased use of third-party providers of legal and professional services to assist in the resolution of regulatory issues and in the resolution of a small number of high value troubled debt relationships as the Company works aggressively to resolve these issues.
•Costs associated with examinations and audits decreased $53 thousand, 15.5%, to $288 thousand at December 31, 2015 relative to the year ended December 31, 2014 as the Company incurred fewer costs associated with public registration and auditing in 2015 relative to 2014.
•As part of the program to consolidate and update physical locations, including the closure of an in-store branch, the Company disposed of many obsolete assets and wrote down the carrying values of many more. During the year ended December 31, 2015, the write-down and disposal of fixed and worthless assets and lease buyout costs totaled $348 thousand versus no write-downs during the previous year.
•Director fees were $41 thousand, or 23.6%, higher in the year ended December 31, 2015 totaling $215 thousand versus $174 thousand in 2014. The Company increased the annual retainer as well as increasing the number and frequency of meetings.
•Other noninterest expense increased by $134 thousand, or 32.8%, to $543 thousand for the year ended December 31, 2015 from $409 thousand for the year ended December 31, 2014. Calendar year 2015 included one time, nonrecurring charges of $60 thousand related to the repurchase of a sold mortgage loan and $25 thousand in settlement of litigation, while calendar year 2014 included nonrecurring gains of $40 thousand on the sale of other assets.
Income Taxes. Management assesses the valuation allowance recorded against deferred tax assets at each reporting period. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. Accounting Standards Codification 740, Income Taxes, requires companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.
In the fourth quarter of 2014, the Company reversed the entire valuation allowance on deferred tax assets of $5.1 million. The Company had established a full valuation allowance on the deferred tax asset in 2012 due to the realization of significant losses and uncertainty about the Company’s future earnings forecasts. Recapture of this valuation allowance made the Company subject to accruing and recording of the appropriate income tax expense going forward. Although no taxes are due as a result of the operating loss carryforward, expense is recognized.
The Company expects to realize $4.7 million of deferred tax assets related to net operating loss carryforwards well in advance of the statutory carryforward period. At December 31, 2015, $0.8 million of existing deferred tax assets were not related to net operating losses and therefore have no expiration date.
The valuation allowance could be reinstated should future events dictate and could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at December 31, 2014 that it was more likely than not that the net deferred tax assets of $5.1 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recognized for some or all of the deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s financial condition and results of operations.
Changes in Condition from December 31, 2014 to December 31, 2015. Total assets decreased $18.0 million, or 8.9%, to $183.8 million on December 31, 2015 from $201.8 million on December 31, 2014. This reduction in asset size is part of a strategic objective.
Loan Portfolio. Gross loans increased $2.8 million or 1.9% to $149.2 million as of December 31, 2015 from a balance of $146.4 million on December 31, 2014. The increase can be attributed, in part, to $36.0 million of new loan originations, partially offset by loan charge offs/charge downs of $1.7 million, transfers to OREO of $0.2 million and principal repayments of $31.3 million (includes repayments on revolving lines of credit). The new originations were primarily consumer loans, with mortgage originations totaling $9.0 million and consumer loan originations of $11.0 million. The emphasis on consumer lending is part of a strategic initiative to re-balance the loan portfolio to be more equally weighted between commercial and consumer loans. This trend is expected to continue into 2016 and is a centerpiece of the 2016 profit plan.
The Company’s loan portfolio represents the largest and highest yielding assets. The fundamental lending business of the Company is based on understanding, measuring, and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry, or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience, while loans secured by personal property, such as auto loans, are generally expected to experience more elevated credit losses. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Declining economic conditions have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.
To control and manage credit risk, management has a credit process in place to ensure credit standards are maintained along with strong oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits, and the aggressive management of problem credits. Executive management has implemented the following measures to proactively manage credit risk in the loan portfolios:
1)Reviewed all underwriting guidelines for various loan segments and have strengthened underwriting guidelines where needed;
2)Evaluated outside loan review parameters, engaging the services of a well-established firm to continue with such loan review, addressing not only specific loans but underwriting analysis, documentation, credit evaluation, and risk identification;
3)Increased the frequency of internal reviews of past due and delinquent loans to assess probable credit risks early in the delinquency process to minimize losses;
4)Aggressively seeks ownership and control, when appropriate, of real estate properties, which would otherwise go through time-consuming and costly foreclosure proceedings to effectively control the disposition of such collateral;
5)Aggressively obtaining updated financial information on commercial credits and performing analytical reviews to determine debt source capacities in business performance trends; and
6)Engaged a well-established auditing firm to analyze the Company’s loan loss reserve methodology and documentation.
The following is a schedule of loan maturities and repricing based on contract terms as of December 31, 2015.
Scheduled Loan Maturities/Repricings
Of the loans included in the preceding schedule, 67.4% are adjustable rate and 32.6% are fixed rate to maturity.
Allowance for Loan Loss. The ALLL represents management’s estimate of losses inherent in the loan portfolio. The allowance is actively managed to ensure future earnings are not impacted by credit losses. Reserves are based on historical loss analysis, assessment of current portfolio, and market conditions, and any identified loss potential in specific credits. Reserve levels are recommended by senior management on a quarterly basis and approved by the Board of Directors.
The ALLL is managed to create a reserve that is adequate and conservative, but not excessive. The ALLL is composed of a reserve to absorb probable and quantifiable losses based on current knowledge of the loan portfolio and a reserve to absorb losses which are not specifically identified, but can be reasonably expected.
Following the guidelines set forth in GAAP, Interagency Policy Statements on the Allowance for Loan and Lease Losses, and all other relevant supervisory guidance, the adequacy of the ALLL is ensured by applying consistent methods of identification, analysis, computation, documentation, and reporting.
The Bank’s ALLL has two components, the general reserve and the specific reserve. Included in the general reserve is the environmental reserve.
The general reserve is calculated by applying annualized net loan losses taken during a 36 month rolling look back period to the current loan portfolio, less any loans considered in the specific reserve analysis. To reflect the variations in risk of different loan products, the portfolio is segmented by collateral type, borrower type, and underwriting process.
The specific reserve is the calculated impairment of all loans classified as impaired, with a minimum outstanding principal balance of $100,000. A loan is classified as impaired when it is probable that the Bank will not be able to collect all amounts due according to the loan agreement’s contractual terms. All loans classified as Troubled Debt Restructurings are also evaluated in the specific reserve. Impairment is measured based on one of the three following methods:
•Present value of expected future cash flows discounted at the loan’s effective interest rate;
•Loan’s observable market price; or
•Fair value of the collateral if the loan is collateral dependent.
The environmental reserve allows management to consider qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical loss experience. The Bank’s environmental reserve considers 11 risk factors which are evaluated as minimal, low, moderate, or high risk. As the overall risk level of the environmental factors increases, the proportion of the loan portfolio held in reserve also increases. Risk factors considered in the analysis are:
•Lending experience, with particular attention paid to new lenders;
•Exceptions to loan policy;
•Rate of total portfolio delinquency;
•Growth rate of loan portfolio;
•Exposure to loan concentrations;
•Exposure to “watch list” loans;
•Consumer sentiment;
•Local economic conditions;
•Regulatory risk;
•Unemployment, with particular attention paid to local unemployment; and
•Vintage risk, with particular attention paid to underwriting procedures at time loans were made.
Percentage of Each Loan Segment to Total Loans. Summary of the allowance for loan losses allocated by loan segment at December 31,
The Bank’s ALLL level was 1.39% of total loans as of December 31, 2015 and 2.64% of total loans as of December 31, 2014.
The general reserve comprised 47% of the total allowance at December 31, 2015, compared to 57% at December 31, 2014, while the specific allowance accounted for 9% of the total allowance at December 31, 2015, compared to 30% at December 31, 2014. The severity of estimated losses on impaired loans can differ substantially from actual losses. The general reserve is calculated in two parts based on an internal risk classification of loans within each portfolio segment. General reserves on loans considered to be “classified” under regulatory guidance are calculated separately from loans considered to be “pass” rated under the same guidance. This segregation allows the Company to monitor the reserves related to higher risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of reserves. The ALLL decreased $1.8 million, 46.3%, year-over-year to $2.1 million as of December 31, 2015 from $3.9 million on December 31, 2014. The decrease resulted from the net effect of charge-offs totaling $1,672 thousand and a provision recovery of $250 thousand, offset by $131 thousand in recoveries.
Summary of Allowance for Loan Losses. The following schedule summarizes the charge-offs and recoveries by loan segment, charged to the allowance for loan losses for the year ended December 31:
Management has taken steps to address current problem loans and has attempted to implement an infrastructure to prevent nonperforming loans and charge-offs from reaching the levels of the past few years in the future.
To understand and address existing weaknesses in the loan portfolio, the loan monitoring process has been centralized and additional qualified staff has been hired to review the loan portfolio and ensure that credits are appropriately graded and adequate levels of loan loss reserve are established. All large loan relationships have been analyzed to identify cash flow, collateral, and structural weaknesses. Such monitoring is being done on an ongoing basis according to the following timeframe: $250 thousand to $1 million exposure, annually; $1 million exposure, semiannually; watch list loans with aggregate exposure >$100 thousand are analyzed each quarter.
Underwriting has also been largely centralized and is an independent function of lending. All commercial loan requests > $25 thousand, all consumer loan requests > $50 thousand, and all unsecured loan requests > $10 thousand are centrally underwritten. Additionally, any loan request to a customer with aggregate exposure > $100 thousand requires centralized underwriting. Underwriting provides an approve/deny recommendation and loans with a deny recommendation cannot be approved outside the Officers’ Loan Committee.
In addition to centralizing the account monitoring and underwriting processes, the Bank has significantly strengthened its lending policy. Loan approval levels have been adjusted downward and customers with loan exposure in excess of $1.5 million require approval from the Board of Directors.
Nonaccrual & Impaired Loans. Before loans are charged off, they typically go through a phase of nonperforming status. Various stages exist when dealing with such nonperformance. The first stage is simple delinquency, where customers consistently start paying late, 30, 60, 90 days at a time. These accounts may then be put on a list of loans to “watch” as they continue to under-perform according to original terms. Loans are placed on nonaccrual status when management believes the collection of the principal and interest is doubtful. A delinquent loan is generally placed on nonaccrual status when principal and/or interest is past due 90 days or more or if the financial strength of the borrower has declined, collateral value has declined, or other facts would make the repayment of the loan suspect, unless the loan is well-secured or in the process of collection. When a loan is placed on nonaccrual, all interest which has been accrued is charged back against current earnings as a reduction in interest income, which adversely affects the yield on loans in the period of reversal. No additional interest is accrued on the loan balance until collection of both principal and interest becomes reasonably certain. Loans placed on nonaccrual status may be returned to accrual status after payments are received for a minimum of six consecutive months in accordance with the loan documents, and any doubt as to the loan’s full collectability has been removed or the troubled loan is restructured and evidenced by a credit evaluation of the borrower’s financial condition and the prospects for full payment.
Management considers a loan to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the observable market price of the loan, except when the sole (remaining) source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of discounted cash flows. If management determines the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate or a charge-off to the allowance. When management determines an impaired loan is a confirmed loss, the estimated impairment is directly charged-off to the loan rather than creating a specific reserve for inclusion in the allowance for loan losses. However, not all impaired loans are in nonaccrual status because they may be current with regards to the payment terms. Their determination as an impaired loan is based on some inherent weakness in the credit that may, if certain circumstances occur or arise, result in an inability to comply with the loan agreement’s contractual terms. Impaired loans exclude large groups of smaller-homogeneous loans that are collectively evaluated for impairment such as consumer real estate and installment loans.
Summary of Impaired Loans. The following schedule summarizes impaired and non-performing loans at December 31,
Nonperforming loans, comprised of loans on nonaccrual status along with loans that are contractually past due 90 days or more but have not been classified as nonaccrual, totaled $1.4 million at December 31, 2015, a decrease of $6.3 million or 82.5%, compared to nonperforming loans of $7.7 million at December 31, 2014. The decrease in nonperforming loans was primarily due to management’s proactive approach to identify and resolve nonperforming loans and to the reclassification of $0.2 million of principal to OREO, the payoffs and paydowns of $3.9 million, $1.1 million which was subsequently upgraded, and the charge-off/charge-down of $1.5 million, offset by the addition of $0.2 million. Nonperforming loans to total net loans was 0.92% at December 31, 2015 and 5.28% at December 31, 2014. Nonperforming loans represented 0.86% of total assets at December 31, 2015 compared to 4.36% at December 31, 2014.
The allowance for loan losses, specifically related to impaired loans was $0.2 million at December 31, 2015 and $1.2 million at December 31, 2014, and related to loans with principal balances of $3.1 million and $11.3 million respectively. The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on the loan portfolio, unless a loan is placed on nonaccrual status. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.
Troubled Debt Restructurings. In certain circumstances, the Company may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near term. In most cases, the modification is either a concessionary reduction in interest rate, extension of the maturity date, or reduction in the principal balance that would otherwise not be considered. Concessionary modifications are classified as troubled debt restructurings unless the modification results in only an insignificant delay in the payments to be received. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be collateral dependent, the loan is reported at the fair value of the collateral. All such restructured loans are considered impaired loans and may either be in accruing or nonaccruing status. If the borrower has demonstrated performance under the previous terms and the Company’s underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. The Company continues to work with customers to modify loans for borrowers who are experiencing financial difficulties.
Troubled debt restructured loans totaled $1.8 million at December 31, 2015 and $5.2 million as of December 31, 2014. Of those balances, $1.2 million was on accrual basis as of December 31, 2015 and $3.3 million as of December 31, 2014. During 2015, 13 loan relationships totaling $0.9 million in principal were restructured.
There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings as of December 31, 2015.
Other Real Estate Owned. As of December 31, 2015, the Bank’s OREO portfolio consisted of 7 properties with a cost basis of $418 thousand and a nominal valuation allowance bringing the carrying value to $238 thousand. Management believes the carrying value for the OREO portfolio approximated liquidation value as of December 31, 2015. It is the intention of the Board of Directors and management to liquidate all existing OREO properties as of December 31, 2015 prior to December 31, 2016.
Investment Portfolio. The Company’s available for sale investment portfolio decreased $17.2 million, 55.0%, to $14.0 million as of December 31, 2015 from $31.2 million as of December 31, 2014. The decrease resulted from maturity and principal payments totaling $5.8 million, sales of $14.4 million offset by purchases of $3.1 million, and reduced market value of $0.1 million, less amortization of $0.1 million. As of December 31, 2015, the investment portfolio reported an unrealized loss of $82 thousand versus an unrealized loss of $10 thousand at December 31, 2014.
At December 31, 2015, there were no concentrations of securities of any one issuer whose carrying value exceeded 10% of shareholders’ equity.
Maturity Schedule of Investment Securities. Maturity schedule (by contractual maturity or, if applicable, earliest call date) of the Company’s investment securities, by carrying value, and the related weighted average yield at December 31, 2015:
The weighted average interest rates are based on interest rates for investments purchased at par value and on effective interest rates considering amortization or accretion if the investment and mortgage backed securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations has been determined on a tax equivalent basis. Other investment securities consisting of Federal Home Loan Bank stock that bears no stated maturity or yield is not included in this analysis. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions. Yields are based on amortized cost balances.
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. The mortgage backed securities may mature earlier than their contractual maturities because of principal prepayments.
Cash and Cash Equivalents. Cash and cash equivalents totaled $9.4 million as of December 31, 2015, a $7.3 million, or 43.7%, decrease from the December 31, 2014 balance of $16.6 million.
Premises and Equipment. Premises and equipment decreased $73 thousand or, 2.4%, to $3.0 million at December 31, 2015 from $3.1 million at December 31, 2014. The decrease can be attributed to depreciation expense of $291 thousand and write-downs and disposals of $132 thousand, partially offset by building improvements and purchases of $350 thousand during 2015.
Other Assets. Other assets increased $2.8 million during the period December 31, 2014 to December 31, 2015. In September 2015, the Bank purchased $3.0 million of Bank Owned Life Insurance (BOLI), written on the principal officers with the Bank as primary beneficiary.
Deposits and Borrowings. The Company’s primary source of funds is customer deposits. The Bank offers a variety of deposit products in an attempt to remain competitive and respond to changes in consumer demand. The Company relies primarily on its high quality customer service, sales programs, customer referrals, and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company’s lending and investment activities and the interest paid for deposits must be carefully managed to control the level of interest expense.
The deposit portfolio decreased $15.6 million, or 8.8%, to $162.3 million as of December 31, 2015 from $178.0 million as of December 31, 2014. Although noninterest bearing accounts were up $3.0 million, or 12.8%, and NOW accounts increased $3.4 million (15.1%), respectively, year-over-year, significant decreases occurred in certificates of deposit ($17.3 million or 23.5%). The decrease in time deposits can be attributed to a pricing strategy of setting competitive offering rates, but not the highest deposit rates in our market, resulting in an 18 bps year-over-year decrease in the cost of deposits. Management expects these trends to moderate in 2016.
Large Time Deposits. The following table sets forth the maturities of the Bank’s certificates of deposit having principal amounts greater than $250,000 at December 31:
Average Deposits. Average deposit balances and average rates paid are summarized as follows for the years ended December 31:
As of December 31, 2015 the Bank had no brokered deposits, whereas at December 31, 2014 the Bank had one brokered deposit agreement totaling $3.0 million.
Other Borrowings. Borrowed funds totaled $2.6 million at December 31, 2015, a decrease of $3.5 million from the $6.1 million as of December 31, 2014.
In February 2015 the Company renegotiated a $2.3 million portion of a $5.0 million note payable. Under the new terms, the $2.3 million note, with an 8.00% interest rate and a maturity date of December 2015, was retired, and the Company issued $656 thousand of common stock and a new note totaling $1.644 million with a 6.00% interest rate and a maturity date of August 2021 was issued. The original note in the amount of $2.7 million remained intact (Note A).
In September 2015 the Company made a $1.0 million principal payment to Note A from available funds at the Holding Company level. In November 2015 the Bank requested permission from the FDIC and DFI to pay a one-time dividend to the Holding Company for the purpose of retiring Note A. In December 2015, permission was granted, the dividend of $1.3 million was paid, and Note A was retired.
At December 31, 2015, borrowings consist of three loans to the Bancorp from outside creditors. The loans must be repaid from Bancorp cash. Per the Consent Order with the FDIC, the Bank is not permitted to make any forms of payments to Bancorp. As of December 31, 2015, Bancorp’s cash position was $346 thousand. Management is engaged in the sale of the remainder of the OREO property held at the Bancorp, which will generate additional cash at the Bancorp level.
No FHLB borrowings were outstanding as of December 31, 2015 or December 31, 2014. The Bank had an approved FHLB line-of-credit of $46.0 million as of December 31, 2015. In addition, the Company has a collateralized federal fund line of $8.5 million with the FRB and $1.0 million unsecured line with Great Lakes Bankers Bank. Neither line was drawn upon as of December 31, 2015. The FHLB line was secured via the pledge of mortgage loans totaling $77.5 million and the Federal Reserve federal fund line is secured via the pledge of $11.1 million of automobile loans.
Accrued Interest Payable. Accrued interest payable on deposits decreased by $733 thousand, or 49.1%, from $1.5 million at December 31, 2014 to $0.8 million at December 31, 2015. This decrease is the result of, and in line with, the year over year decrease in certificates of deposit.
Other Liabilities. Other liabilities decreased $0.6 million from December 31, 2014 to December 31, 2015. Funding of the underfunded pension plan reduced unfunded pension liabilities by $0.7 million at December 31, 2015 to $46 thousand.
Concentrations of Credit Risk. Financial institutions such as the Bank generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. Citizens Bank’s loan portfolio is concentrated geographically in central Ohio. Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for these properties totaled $28.9 million at December 31, 2015 versus $28.6 million at December 31, 2014. At December 31, 2015, non-owner occupied residential real estate represented 19.4% of the loan portfolio, down from 19.5% of the Bank’s loan portfolio at December 31, 2014. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at December 31, 2015 versus 4.8% at December 31, 2014.
Liquidity and Capital Resources
The Company’s primary source of liquidity is its core deposit base, raised through the Bank’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.
Cash used by operating activities was $0.3 million in the year ended in December 31, 2015 and $0.7 million generated by those activities in the year ended December 31, 2014. The major adjustment made to reconcile net income to cash provided by or used in operations during the periods presented was the $0.7 million decrease in accrued interest payable and a decrease of $0.6 million in other liabilities in 2015 and the adjustment for the removal of the deferred tax asset allowance of $5.1 million in 2014. Net income, net of the deferred tax asset allowance in 2014, was $0.3 million greater than that of 2015.
The primary investing activity of the Bank is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. In considering the more typical investing activities, during 2015, $20.2 million was generated from the combination of maturity, pay-downs, calls or sale of available for sale investment securities, $3.1 million was used to purchase available for sale securities, and $3.0 million was used to purchase bank owned life insurance policies on key executives. During 2014, $8.7 million was generated from maturities, pay-downs, and sales of investment securities and $5.1 million was used to purchase securities. Proceeds from the sale of other real estate owned generated $1.1 million in cash during the year ended December 31, 2015 and $2.9 million during 2014. During 2015, $4.5 million in cash was used to fund net loan growth while in 2014 that number was $0.9 million.
For 2015, total deposits decreased by $15.6 million versus a decline of $7.6 million during 2014. The Company had no activity in FHLB advances during either 2015 or 2014. The 2014 capital campaign raised $3.2 million after all related expenses were deducted, and in 2015 $1.3 million in capital was raised through the exercise of outstanding warrants. For additional information about cash flows from the Bank’s operating, investing, and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
As disclosed in Note J of the notes to consolidated financial statements, the Company has also entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. As a result of the Company’s off-balance sheet arrangements for 2015 and 2014, no material revenue, expenses, or cash flows were recognized. In addition, the Company had no other indebtedness or retained interests nor entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Shareholders of
Citizens Independent Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Citizens Independent Bancorp, Inc. and subsidiary (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Independent Bancorp, Inc. and subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Suttle & Stalnaker, PLLC
Parkersburg, West Virginia
March 24, 2016
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
See notes to consolidated financial statements
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2015 and 2014
See notes to consolidated financial statements
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2015 and 2014
See notes to consolidated financial statements
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2015 and 2014
See notes to consolidated financial statements
CITIZENS INDEPENDENT BANCORP, INC.
Logan, Ohio
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2015 and 2014
See notes to consolidated financial statements
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Citizens Independent Bancorp, Inc. (the Bancorp) is a bank holding company whose wholly-owned bank subsidiary, The Citizens Bank of Logan (the Bank), together referred to as the Company, is engaged in the business of commercial and retail banking services with operations conducted through offices in Hocking and Athens counties. These communities and surrounding areas are the source of substantially all the Company’s deposit and loan activities. Secured loans are secured by business assets, consumer assets, residential real estate, and non-residential real estate. The majority of Company income is derived from commercial, real estate, and retail lending activities and investments. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.
In October 2012, the Bank entered into publicly available Consent Orders with the Federal Deposit Insurance Corporation (FDIC) and the Ohio Division of Financial Institutions (DFI) (collectively referred to as the Orders), which required the Bank to take a number of actions. In October 2015, both the FDIC and DFI lifted their respective Consent Orders. Significant among the ongoing required actions is the development of a Capital Plan which will result in the Bank meeting and maintaining its level of Tier 1 capital as a percentage of its total assets at a minimum of 8.00% and its level of qualifying total capital as a percentage of risk-weighted assets at a minimum of 11.50%. The Bank is also required to obtain approval from the FDIC and DFI prior to the payment of any dividends.
Basis of Financial Statement Presentation
The accounting and reporting policies of the Bancorp and the Bank conform with accounting principles generally accepted in the United States of America and to general practices followed within the banking industry.
To conform to the 2015 presentation, certain reclassifications have been made to prior amounts, which had no impact on net income, comprehensive income, or shareholders’ equity.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment Securities
Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity.
Debt securities not classified as held-to-maturity are classified as available for sale. Securities available-for-sale are carried at fair value with unrealized gains and losses, net of the deferred income tax effect, reported in accumulated other comprehensive income. Realized gains (losses) on securities available for sale are included in noninterest income (expense) and, when applicable, are reported as a reclassification adjustment, net of income tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.
Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses of which none have been reported in the periods presented.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan losses and unearned discounts. Interest on loans is accrued based on principal amounts outstanding.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
Interest accrued in the current year but not collected for loans that are placed on nonaccrual or charged off is reversed against current interest income and unpaid interest accrued in prior years is charged to the allowance for loan losses. The interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Consistent with the Bank’s existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or market value determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance through charges to income. Gains and losses on the sale of loans held for sale are determined using the specific identification method.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and environmental components. The specific component relates to loans that are classified as doubtful, substandard, or troubled debt restructurings (TDRs). For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
Troubled Debt Restructurings (TDRs)
Management classifies loans as TDRs when a borrower is experiencing financial difficulties and the Bank has granted a concession. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.
Management’s policy is to modify loans by extending the term or by granting a temporary or permanent contractual interest rate below the market rate. TDRs are separately identified for impairment disclosures and are measured by the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral.
Premises and Equipment
Land is carried at cost. Other premises and equipment are recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets. Useful lives are revised when a change in life expectancy becomes apparent. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains or losses on dispositions are included in current operations as realized.
Other Real Estate Owned (OREO)
OREO is recorded at fair value less anticipated selling costs (net realizable value) and consists of property acquired through loan foreclosure. If the net realizable value is below the carrying value of the loan at the date of transfer, the difference is charged to the allowance for loan losses. Subsequent declines in the fair value of real estate are classified as OREO devaluations, which are reported as adjustments to the carrying value of OREO and are recorded as a charge to operations included in noninterest expense. In certain circumstances where management believes the devaluation may not be permanent in nature, the Company utilizes a valuation allowance to record OREO devaluations, which is also expensed through noninterest expense. Costs relating to development and improvement of such properties are capitalized (not in excess of fair value less estimated costs to sell) and costs relating to holding the properties are charged to expense.
Bank Owned Life Insurance
The Bank had previously purchased a life insurance policy on one retired executive. In September 2015, the Bank purchased additional life insurance policies on ten members of senior management. Bank owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the asset value are recorded as earnings in other income.
Accumulated Other Comprehensive Income
The accumulated other comprehensive income component of equity results from the unrealized gains and losses on available for sale securities and from the unrecognized actuarial loss of the pension plan.
Employee Benefit Plans
Pension expense is the net of service and interest cost, return on plan assets, and amortization of gains and losses not immediately recognized. 401(k) plan expense is based on the Company’s annual contribution.
Earnings Per Common Share
Earnings per common share are net income available to common shareholders divided by the weighted average common shares outstanding during the period. The factors used in the earnings per share computation follow:
At December 31, 2015, there were 67,985 warrants outstanding. Each warrant allows the holder to purchase a share of Bancorp common stock at a price equal to 90% of the book price per share at the close of the preceding month. These warrants expire at June 25, 2016.
In 2014, the Company offered a total of 369,754 common shares plus 184,877 warrants, for a total of 554,631 shares, selling a total of 238,057 shares and issuing a total of 119,003 warrants with those shares. Net proceeds after expenses were $3.2 million. Other than an investment in the Bank, the Company currently has no arrangements or understandings regarding any specific use of proceeds.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of securities available for sale, allowance for loan losses, subsequent loss write-downs on other real estate owned, accumulated depreciation, nonaccrual interest on loans, and accrued employee benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Bancorp files consolidated income tax returns with the Bank.
Advertising
Advertising costs are charged to operations when incurred.
Statements of Cash Flows
The Company considers cash and amounts due from depository institutions, interest-bearing deposits in other banks, and federal funds sold, all of which have an original maturity of 90 days or less, to be cash and cash equivalents for purposes of the statements of cash flows. The following are supplemental disclosures for the years ended December 31, 2015 and 2014, respectively.
Industry Segments
While the Bancorp’s chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.
Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” This ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through similar legal agreement. Additionally, the amendments require interim and annual disclosures of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. This ASU became effective for the Company on January 1, 2015. The adoption of ASU No. 2014-04 did not have a material impact on the Company’s financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle will be achieved using a five step process. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606).” which amends the effective date for the Company from January 1, 2017 to January 1, 2018. The adoptions of ASU No. 2014-09 and ASU No. 2015-14 are not expected to have a material impact on the Company’s financial statements.
In August 2014, the FASB issued ASU No. 2014-14, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This ASU became effective for the Company on January 1, 2015. The adoption of ASU No. 2014-14 did not have a material impact on the Company’s financial statements.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis”. ASU No. 2015-02 eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. This ASU will become effective for the Company on January 1, 2016. The adoption of ASU No. 2015-02 is not expected to have a material impact on the Company’s financial statements.
In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU No. 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU will become effective for the Company on January 1, 2016. The adoption of ASU No. 2015-07 is not expected to have a material impact on the Company’s financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”. The new standard significantly revises an entity’s accounting related to 1) the classification and measurement of investments in equity securities and 2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The amendment requires equity investments (excluding investments accounted for under the equity method or that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. This ASU will become effective for the Company on January 1, 2018. The adoption will require a cumulative effect to the statement of financial position as of the beginning of the first reporting period. The Company has not determined the expected effect of the adoption of ASU No. 2016-01.
NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily cash and due from bank reserve balances in accordance with regulatory requirements. The balance maintained under such requirements was $1,064,000 and $889,000 as of December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Bank was required to maintain a minimum balance of $861,000 with Great Lakes Bankers Bank.
NOTE C - INVESTMENT SECURITIES
The amortized cost of securities and their estimated fair values are as follows:
The following is a summary of maturities of securities available for sale as of December 31, 2015:
Mortgage backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. The amortized cost and fair value of mortgage backed securities are presented in the available for sale category by contractual maturity in the preceding table.
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
In 2015, the Bank sold $14.2 million of the investment securities portfolio for total proceeds of $14.4 million, with a realized gain of $0.2 million. There were no losses on sales of investments in 2015. During 2014, the Bank sold the tax exempt municipal securities portfolio. Total proceeds were $4.7 million and the realized gain was $0.2 million.
There were no securities transferred between classifications during either 2015 or 2014.
Investment securities with a carrying amount of approximately $2,848,000 and $28,793,000 were pledged to secure deposits as required or permitted by law at December 31, 2015, and 2014, respectively.
The caption “Other investment securities” in the consolidated balance sheets consists of Federal Home Loan Bank stock. This equity security is carried at cost since it may only be sold back to the Federal Home Loan Bank or another member at par value.
Information pertaining to securities with gross unrealized losses at December 31, 2015 and 2014 aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
The investment portfolio contains unrealized losses of direct obligations of U.S. government agencies securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, and debt obligations of a U.S. state or political subdivision. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.
Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any recovery in fair value.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
The following tables provide information on the activity in the allowance for loan losses by the respective loan portfolio segment for the periods indicated:
The following tables present the recorded investment with respect to loans and the related allowance by portfolio segment at the dates indicated:
As part of its monitoring process, the Bank utilizes a risk rating system which quantifies the risk the Bank estimates it has assumed when entering into a loan transaction and during the life of that loan. The system rates the strength of the borrower and the transaction and is designed to provide a program for risk management and early detection of problems. Loans are graded on a scale of 1 through 8, with a grade of 4 or below classified as “Pass” rated credits. Following is a description of the general characteristics of risk grades 5 through 8:
5 - Special Mention
The weighted overall risk associated with this credit is considered higher than normal (but still acceptable) or the loan possesses deficiencies which corrective action by the Bank would remedy, thereby reducing risk.
6 - Substandard
The weighted overall risk associated with this credit (based on each of the Bank’s creditworthiness criteria) is considered undesirable, the credit demonstrates a well-defined weakness or the Bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected.
7 - Doubtful
Weakness makes collection or liquidation in full (based on currently existing facts) improbable.
8 - Loss
This credit is of little value and not warranted as a bankable asset. Accordingly, the Bank does not carry any loans on the books that are graded 8 - loss, instead these loans are charged off.
The Bank’s strategy for credit risk management includes ongoing credit examinations and management reviews of loans exhibiting deterioration of credit quality. Such monitoring is being done on an ongoing basis according to the following timeframe: $250,000 to $1,000,000 exposure, annually; $1,000,000 exposure, semiannually; watch list loans with aggregate exposure >$100,000 are analyzed each quarter. A deteriorating credit indicates an elevated likelihood of delinquency. When a loan becomes delinquent, its credit grade is reviewed and changed accordingly. Each downgrade to a classified credit results in a higher percentage of reserve to reflect the increased likelihood of loss for similarity graded credits. Further deterioration could result in a certain credit being deemed impaired resulting in a collateral valuation for purposes of establishing a specific reserve which reflects the possible extent of such loss for that credit.
The following tables present the risk category of loans by class of loans based on the most recent analysis performed at December 31, 2015 and December 31, 2014.
Commercial Credit Exposure
Credit risk profile by credit worthiness category
Consumer Credit Exposure
Credit risk profile by credit worthiness category
Loans evaluated for impairment include loans classified as troubled debt restructurings and non-performing commercial, mortgage, and consumer loans. Impairment is evaluated in total for smaller balance loans of a similar nature, and on an individual loan basis for other loans. The following tables set forth certain information regarding the Bank’s impaired loans, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of the periods indicated:
The following tables present the average recorded investments in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio class for the periods indicated.
The following table summarizes information relative to troubled debt restructured (TDR) loans which were modified during the years ended December 31, 2015 and 2014.
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Bank offers various types of concessions when modifying a loan. Loan terms that may be modified due to a borrower’s financial situation include, but are not limited to, a reduction in the stated interest rate, a reduction in the face amount of the debt, a reduction of the accrued interest, temporary interest-only payments, or re-aging, extensions, deferrals, renewals and rewrites. In mitigation, additional collateral, a co-borrower or a guarantor may be requested.
During 2015, loans were modified by either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. The interest rate on nine loans was reduced, often in concert with an extended amortization period. Three loans maintained the original interest rate, but the amortization period was extended. A single loan was changed to interest only payments with a balloon payment due at the maturity.
During 2014, loans were modified by a either a reduction in interest rates, a change in the contractual maturity date of the note, or a final payment modification. Five loans were modified with reduced interest rates, the contractual maturity date of eight loans was extended, and two loans had a final balloon payment added at maturity.
Loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have in some cases been taken against the outstanding loan balance. The allowance for impaired loans that has been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows, discounted at the loan’s original effective interest rate. Management exercises significant judgment in developing these determinations.
There were no loans which were modified as a TDR within the previous twelve months that have subsequently re-defaulted as of December 31, 2015.
As of December 31, 2015, there are no commitments to lend additional funds to any borrower whose loan terms have been modified as a TDR.
The following table presents the loan portfolio summarized by aging categories, at December 31, 2015 and 2014:
The following summarizes loans on nonaccrual status at December 31, 2015 and 2014.
Management has identified lending for non-owner occupied residential real estate as a lending concentration. Total loans for these properties totaled $28.9 million at December 31, 2015 versus $28.6 million at December 31, 2014. At December 31, 2015, non-owner occupied residential real estate represented 19.4% of the loan portfolio, down from 19.5% of the Bank’s loan portfolio at December 31, 2014. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 2.1% at December 31, 2015 versus 4.8% at December 31, 2014.
In the ordinary course of business, the Bancorp and the Bank have and expect to continue to have transactions, including borrowings, with their officers, directors, and their affiliates. In the opinion of management, such transactions were on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time of comparable transactions with other customers and did not involve more than a normal credit risk of collectability or present any other unfavorable features to the Bancorp and the Bank. Loans to such borrowers are summarized as follows:
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2015 and 2014 follows:
The Company has entered into various operating lease arrangements. The leases expire at various dates throughout 2016 and provide options for renewal. The total rental expense charged to operations for the years ended December 31, 2015 and 2014 amounted to $126,000 and $160,000, respectively. At December 31, 2015, the total future minimum lease commitments under the leases were:
NOTE F - BANK OWNED LIFE INSURANCE
In 2015, the Bank invested in whole life insurance contracts on the lives of ten current officers who have provided positive consent allowing the Bank to be named beneficiary of these insurance contracts. An existing policy on a former employee is also in place. These policies are recorded at their cash surrender values which are presented in the consolidated balance sheets in “Other assets.” These contracts are insurance products of Massachusetts Mutual Life Insurance Company, New York Life Insurance Company, and the First Penn-Pacific and consist of (21) policies. These policies have a stated aggregate death benefit as of December 31, 2015 and 2014 of $9.7 million and $0.4 million, respectively, and aggregate cash surrender values of $3,320,000 and $281,000 as of December 31, 2015 and 2014, respectively.
The initial policy was funded by a premium payment of $121 thousand. The Bank purchased additional policies in September, 2015 for $3.0 million. Cash surrender value increases to the carrying amounts of the policies are recognized as income of $39,000 and $8,000 for the years ended December 31, 2015 and 2014, respectively.
NOTE G - DEPOSITS
Deposit account balances at December 31, 2015 and 2014, are summarized as follows:
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $250,000 was $7,258,000 and $19,526,000 at December 31, 2015 and 2014, respectively.
At December 31, 2015, scheduled maturities of certificates of deposit are as follows:
The Bank held deposits of approximately $544,000 and $528,000 for executive officers and directors at December 31, 2015 and 2014, respectively.
NOTE H - BORROWED FUNDS
Borrowed funds are comprised of the following at December 31:
As of February 9, 2015, the Company had renegotiated a portion of the $5.0 million note payable due December 29, 2015. An interest only note (Note B) for $1,644,546.60, due August 4, 2021, with a fixed interest rate of 6.00%, and 28,675 shares of the Company’s common stock were exchanged for $2.3 million of the original $5.0 million note. The remaining $2.7 million (Note A) of the original $5.0 million note continued unaltered, earning a fixed rate of 8.00%, due December 29, 2015.
In September 2015, the Company made a $1.0 million principal payment to Note A from available funds at the Holding Company level. In November 2015, the Bank requested permission from the FDIC and DFI to pay a one-time dividend to the Holding Company for the purpose of retiring Note A. In December 2015, permission was granted, the dividend was paid, and Note A was retired.
Federal Home Loan Bank (FHLB) advances are collateralized by all shares of FHLB stock owned by the Bank (totaling $859,000) and by 100% of the Bank’s qualifying 1 - 4 family mortgage loans in the amount of $77.5 million. Based on the collateral capacity as of December 31, 2015, total FHLB advances are limited to approximately $46.0 million. There were no FHLB borrowings outstanding at December 31, 2015 or 2014. In addition, the FHLB has issued $14,750,000 of standby letters of credit for the Bank.
In addition, the Company has a collateralized federal funds line of $8.5 million with the Federal Reserve Bank and an unsecured $1.0 million line with Great Lakes Bankers Bank. Neither line was drawn upon as of December 31, 2015. The Federal Reserve federal funds line is secured via the pledge of $11.1 million of automobile loans and the Great Lakes Bankers Bank line is unsecured.
At December 31, 2015, scheduled maturities of notes payable were as follows:
NOTE I - FEDERAL INCOME TAXES
The consolidated provision for income taxes consists of the following for the years ended December 31:
The consolidated provision for federal income taxes differs from that computed by applying federal statutory rates to income before federal income tax expense as indicated in the following analysis:
The deferred tax assets and deferred tax liabilities are comprised of the following at December 31:
At year-end 2015, the Company had federal net operating loss carryforwards of approximately $13,762,000 which will begin to expire in the year 2031.
The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by taxing authorities for years before 2012.
Realization of deferred tax assets is dependent on generating sufficient taxable income prior to their expiration.
In the fourth quarter of 2014, the Company again evaluated the need for a net deferred tax asset valuation allowance, concluded that it is more likely than not that the net deferred tax asset will be realized based upon future taxable income, and reversed the entire valuation allowance on net deferred tax assets of $5.1 million.
The net deferred tax asset of $5.2 million is recorded in other assets.
The Company expects to realize $4.7 million of deferred tax assets related to net operating loss carryforwards well in advance of the statutory carryforward period. At December 31, 2015, $0.8 million of existing deferred tax assets were not related to net operating losses and therefore have no expiration date.
NOTE J- FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments, contingent liabilities, and other financial instruments, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheets.
Financial instruments whose contract amount represents credit risk at December 31, 2015 and 2014 were as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount and type of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, real estate, or income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
The Bank has not incurred any losses on its commitments in either 2015 or 2014.
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp and Bank periodically are subject to claims and lawsuits which arise in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial statements of the Company.
NOTE L - RISKS AND UNCERTAINTIES
Total balances of due from bank balances which were in excess of $250,000 were with the following banks as of December 31, 2015:
NOTE M - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. The Bank normally restricts dividends to a lesser amount. At December 31, 2015, no retained earnings were available for the payment of dividends without prior regulatory approval.
NOTE N - EMPLOYEE BENEFIT PLANS
The Bank has a qualified noncontributory, defined benefit pension plan which covers certain employees. The benefits are primarily based on years of service and earnings.
The following is a summary of the plans funded status as of December 31, 2015 and 2014:
Amounts recognized in the consolidated statements of income consist of:
Other changes recognized in other comprehensive income include:
Weighted-average assumptions used to determine benefit obligation at December 31, 2015 and 2014:
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2015 and 2014:
The actuarial assumptions used in the pension plan valuations are reviewed annually. The Bank’s expected return on plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation, and estimates of future long-term returns by asset class.
As of January 1, 2016, the Bank retained Robert W. Baird & Co. as third party trustee to manage the assets of The Citizens Bank of Logan pension plan. The Bank’s investment policy for Plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds.
The portfolio is to be diversified by investing in multiple types of investment-grade securities. Target allocation percentages for each major class of Plan assets are as follows:
Equity Securities - 85%
Fixed Income Securities - 15%
The Bank’s pension plan weighted-average asset allocations at December 31, 2015 and 2014 by asset category are as follows:
The fair values of the Bank’s pension plan assets presented by asset class within the fair value hierarchy, as defined in Note P - Fair Value of Financial Instruments, at December 31, 2015 and 2014 are as follows:
The Company anticipates making contributions to the pension plan totaling $50,000 during the fiscal year ending December 31, 2016. These contributions will be required to meet ERISA’s minimum funding standards and the estimated quarterly contribution requirements during this period. The amount of the unrecognized net actuarial loss included in accumulated other comprehensive income expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2016 is $51,199. Participants are 100% vested.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
The Company offers a 401(k) profit sharing plan covering substantially all employees. The Company partially matches voluntary employee contributions of up to 4% of individual compensation. The matching percentage was 50% in 2015 and 2014. Employee contributions are vested at all times. The Company’s matching contributions become fully vested after an individual has completed seven years of service. Expense associated with the plan included in salaries and employee benefits was approximately $27,000 in both 2015 and 2014.
Beginning in January 2016, the existing plan will be replaced by a “Safe Harbor” plan as defined by the IRS. The Company matches voluntary employee contributions at a 100% rate up to 3% of individual compensation, then at a 50% rate on the next 2% of individual compensation, for a maximum contribution of 4%. Both employee and Company contributions are 100% vested at all times.
During 2015, the Company entered into an agreement with the current President and CEO to provide future retirement compensation to that executive through a Supplemental Executive Retirement Plan (SERP) agreement. Following retirement, at the normal retirement age of 65, the SERP will provide equal annual payments over the next ten year period of $27,500 per year. The Bank recognized expense of $3,467 in connection with this SERP agreement during the year ended December 31, 2015.
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank and the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as of January 1, 2015, of total capital, Tier I capital and common equity tier 1 capital to risk-weighted assets (as defined in the regulations), and leverage capital, which is tier 1 capital to adjusted average total assets (as defined). Prior to January 1, 2015, minimum amounts and ratios of total capital, tier 1 capital, and leverage capital, which is tier 1 capital to adjusted average total assets (as defined), were required.
As of October 2, 2015, the FDIC and the DFI removed the consent order specifying the Bank maintain an 8.50% Tier 1 leverage ratio and a 13.50% total capital ratio and replaced them with a requirement to maintain an 8.00% Tier 1 leverage ratio and 11.50% total capital ratio. The Bank was well above both of these measures at December 31, 2015. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.
As of December 31, 2014, the FDIC found that the Bank was categorized as undercapitalized per the consent orders then in place. Under the regulatory framework for prompt corrective action, the Bank’s capital status may have precluded the Bank from access to borrowings from the Federal Reserve System through the discount window.
The following table outlines the regulatory components of the Company and the Bank’s capital and capital ratios under the rules applicable as of December 31, 2015 and 2014, respectively.
NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Accounting guidance also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets and liabilities.
Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Accordingly, investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.
Investment securities available for sale - Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or traded by dealers or brokers in active over-the-counter markets. Level 2 securities include securities issued by government sponsored entities, mortgage-backed securities, and municipal bonds. Level 3 securities include those with unobservable inputs. Transfers between levels can occur due to changes in the observability of significant inputs.
The following are assets and liabilities that were accounted for or disclosed at fair value on a recurring basis:
The following describes the valuation techniques used to measure certain financial assets and liabilities recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans - The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses may need to be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. As of December 31, 2014, the fair value of substantially all of the impaired loans was estimated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
Other real estate owned (OREO) - OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the consolidated balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs. The fair value of OREO is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (level 2). However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends (Level 3). Upon foreclosure, any fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense in the consolidated statements of income.
The following are assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis:
The quantitative information about Level 3 fair value measurements for financial assets and liabilities measured at fair value on a nonrecurring basis is as follows (dollars in thousands):
The following methods and assumptions were used to estimate the fair value disclosures for other financial instruments as of December 31, 2015 and 2014:
Cash and cash equivalents - The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.
Other investment securities - Other investment securities consist of restricted equity securities in the Federal Home Loan Bank (FHLB) and are carried at cost. Because there is no market, the carrying values of restricted equity securities approximate fair values based on the redemption provisions of the FHLB.
Loans - The fair value of loans is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.
Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.
Accrued interest receivable and payable - The carrying amounts of accrued interest approximate fair value.
Bank owned life insurance - The fair value of bank owned life insurance approximates the cash surrender value of the policies.
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing and interest-bearing demand deposits, regular savings, and certain types of money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Borrowed funds - the carrying amounts of borrowed funds which mature within 90 days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analysis that applies interest rates currently offered on similar instruments.
Off-balance-sheet instruments - The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments to extend credit and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown.
The estimated fair value of the financial instruments is as follows:
NOTE Q - PARENT COMPANY FINANCIAL STATEMENTS
The following are condensed parent company only financial statements for Citizens Independent Bancorp, Inc.
CONDENSED BALANCE SHEETS
December 31, 2015 and 2014
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 2015 and 2014
CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31, 2015 and 2014
NOTE R - STOCK SUBSCRIPTION
As of June 25, 2014 the Company had sold and issued a total of 238,057 shares of common stock with 119,003 accompanying warrants. As of March 18, 2016, 53,154 warrants have been exercised and an additional 53,154 shares of common stock have been issued.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2015, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015, in timely alerting them to material information required to be in the Company’s (including its consolidated subsidiary) periodic SEC filings.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision and with the participation of management, including principal executive and principal financial officers, an evaluation of the effectiveness of internal control over financial reporting was conducted based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, as required by paragraph (c) of §240.13a-15 of the Exchange Act. Based on the evaluation under Internal Control - Integrated Framework (2013), management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this filing. There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ending December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION
Not applicable.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers. The information required by Item 401 of SEC Regulation S-K concerning the directors of the Company and the nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on May 5, 2016 (the “2016 Annual Meeting”), is incorporated herein by reference from the disclosure included under the caption “Proposal One - Election of Directors” in the 2016 Proxy Statement related to such annual meeting. The information required by Item 401 of SEC Regulation S-K concerning the executive officers of the Company is incorporated herein by reference from the disclosure included under the caption “Executive Officers” in the 2016 Proxy Statement.
Nominating Procedures for Directors. The information required by Item 407(c)(3) of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Corporate Governance - Compensation, Personnel/ Corporate Governance and Nominating Committee” in the 2016 Proxy Statement.
Audit Committee. The information required by Items 407(d)(4) and 407(d)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Committees of the Board of Directors- Audit Committee” in the 2016 Proxy Statement.
Code of Ethics. The Company has adopted a Code of Ethics (the “Code of Ethics”) that applies to all directors, officers, and employees’ of the Company and its subsidiary. The Code of Ethics is included in Exhibit 14 to this Annual Report on Form 10-K.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference from the disclosure included under the captions “Proposal One - Election of Directors”, “Corporate Governance”, and “Executive Officers” in the 2016 Proxy Statement.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership Information. The information required by Item 403 of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the 2016 Proxy Statement.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions. The information required by Item 404 of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Corporate Governance - Related Party Transactions” in the 2016 Proxy Statement.
Director Independence. The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Corporate Governance - The Board of Directors - Independence” in the 2016 Proxy Statement.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference from the disclosure included under the captions “Proposal Two - Ratification of Appointment of Independent Registered Public Accounting Firm” and “Corporate Governance - Audit Committee” in the 2016 Proxy Statement.
PART IV
ITEM 15
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following financial statements appear in Part II of this Annual Report:
(a) Report of Independent Registered Public Accounting Firm;
(b) Consolidated Balance Sheets as of December 31, 2015 and 2014;
(c) Consolidated Statements of Income for the years ended December 31, 2015 and 2014;
(d) Consolidated Statements of Comprehensive Income for the years ended December 31, 2015 and 2014;
(e) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015 and 2014;
(f) Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014;
and
(g) Notes to Consolidated Financial Statements;
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted either because they are not applicable or because the required information is provided in the consolidated financial statements or in the notes thereto.
(a)(3) Exhibits
The following exhibits are filed with or incorporated by reference in this Annual Report on Form 10-K:
Exhibit No. Description
3.1 Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended (Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
3.2 Code of Regulations of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
4.1 Specimen Common Share Certificate of Citizens Independent Bancorp, Inc. (Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
4.2 Form of Warrant Certificate (Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
4.3 Form of Rights Certificate (Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004))
10.1 2012 Consent Order (Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004))
10.2 Employment Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.3 Change of Control Agreement with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.4 Supplemental Executive Retirement Plan with Daniel C. Fischer (Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
Citizen’s Independent Bancorp, Inc. Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.)
Letter from Dixon, Davis, Bagent & Co. to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant. (Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004))
Subsidiary of Citizens Independent Bancorp, Inc. (filed herewith)
Consent of Suttle & Stalnaker (filed herewith)
31.1 Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer (filed herewith)
31.2 Rule 13a-14(A)/15d-14(a) Certification - Principal Financial Officer (filed herewith)
Section 1350 Certification - Principal Executive Officer and Principal Financial Officer (filed herewith)
The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Logan, State of Ohio, on March 22, 2016.
Citizens Independent Bancorp, Inc.
By: /s/ Daniel C. Fischer
Daniel C. Fischer, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
By: /s/ Donald P. Wood
By: /s/ William J. Mauck
Donald P. Wood, Chairman of the Board
William J. Mauck, Director
Date: March 22, 2016
Date: March 22, 2016
By: /s/ Robert Lilley
By: /s/ Daniel Stohs
Robert Lilley, Director
Daniel Stohs, Director
Date: March 22, 2016
Date: March 22, 2016
By: /s/ Michael Shawd
By: /s/ Corby Leach
Michael Shawd, Director
Corby Leach, Director
Date: March 22, 2016
Date: March 22, 2016
By: /s/ BJ King
By: /s/ Jerry Johnson
BJ King, Director
Jerry Johnson, Director
Date: March 22, 2016
Date: March 22, 2016
By: /s/ Robert Wolfinger
By: /s/ James V. Livesay
Robert Wolfinger, Director
James V. Livesay, EVP and Chief Financial Officer
Date: March 22, 2016
Date: March 22, 2016
EXHIBIT INDEX
Exhibit
No.
Description
Location
3.1
Articles of Incorporation of Citizens Independent Bancorp, Inc., as amended
Incorporated by reference to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
3.2
Code of Regulations of Citizens Independent Bancorp, Inc.
Incorporated by reference to Exhibit No. 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
4.1
Specimen Common Share Certificate of Citizens Independent Bancorp, Inc.
Incorporated by reference to Exhibit No. 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
4.2
Form of Warrant Certificate
Incorporated by reference to Exhibit No. 4.2 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
4.3
Form of Rights Certificate
Incorporated by reference to Exhibit No. 4.3 to the Company’s Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 22, 2013 (File No.333-191004)
10.1
2012 Consent Order
Incorporated by reference to Exhibit No. 10.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 5, 2013 (File No.333-191004)
10.2
Employment Agreement with Daniel C. Fischer
Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.3
Change of Control Agreement with Daniel C. Fischer
Incorporated by reference to Exhibit No. 10.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
10.4
Supplemental Executive Retirement Plan with Daniel C. Fischer
Incorporated by reference to Exhibit No. 10.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on January 25, 2016)
Citizen’s Independent Bancorp, Inc. Code of Ethics
Incorporated by reference to Exhibit No. 14 of the Corporation’s Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 17, 2015.
Letter from Dixon, Davis, Bagent & Company to the Securities and Exchange Commission dated November 27, 2013 regarding change in Company’s Certifying Accountant.
Incorporated by reference to Exhibit No. 16.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 2, 2013 (File No.333-191004)
Subsidiary of Citizens Independent Bancorp, Inc.
File herewith
Consent of Suttle & Stalnaker
File herewith
31.1
Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer
File herewith
31.2
Rule 13a-14(A)/15d-14(a) Certification - Principal Financial Officer
File herewith
Section 1350 Certification - Principal Executive Officer and Principal Financial Officer
File herewith
The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Comprehensive Income, and (vi) the Notes to Consolidated Financial Statements.
File herewith