RBC, Inc. & Subsidiary

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS December 31, 2016 and 2015

2 Table of Contents REPORT President s Letter 1 Financial Highlights 2 Independent Auditors Report 3 FINANCIAL STATEMENTS Consolidated Balance Sheets 5 Consolidated Statements of Income 6 Consolidated Statements of Comprehensive Income 7 Consolidated Statements of Stockholders Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 11

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4 Financial Highlights Percent December 31, Increase Consolidated Balance Sheets Total assets $ 269,881,815 $ 264,086, % Loans, net 210,703, ,270, % Total deposits 229,198, ,308, % Stockholders' equity 30,585,906 29,407, % Consolidated Statements of Income Net income $ 3,800,890 $ 3,670, % Earnings per share % Selected Ratios Net income to average total assets 1.42% 1.41% Net income to average stockholders' equity 12.67% 12.82% Allowance for loan losses to loans 1.00% 1.00% Average stockholders' equity to average total assets 11.24% 11.01% Common Stock Book value per share $ $ Cash dividend paid per share Weighted average shares outstanding 522, ,776 2

5 INDEPENDENT AUDITORS' REPORT To the Audit Committee of the Board of Directors and Stockholders of RBC, Inc. and Subsidiary Report on the Financial Statements We have audited the accompanying consolidated financial statements of RBC, Inc. and Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 3

6 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RBC, Inc. and Subsidiary as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. CARR, RIGGS & INGRAM, L.L.C. Certified Public Accountants February 8,

7 Consolidated Balance Sheets December 31, Assets Cash and cash equivalents Cash and due from banks $ 16,916,337 $ 9,681,346 Federal funds sold 125, ,000 Total cash and cash equivalents 17,041,337 10,106,346 Securities available for sale 30,374,833 32,058,986 Other securities, at cost 1,319,600 1,313,800 Loans, net 210,703, ,270,711 Accrued interest receivable 1,127,244 1,030,691 Premises and equipment, net 4,664,960 4,807,703 Bank owned life insurance 3,753,814 3,647,616 Other assets 896, ,601 Total assets $ 269,881,815 $ 264,086,454 Liabilities and Stockholders' Equity Liabilities Deposits Interest bearing $ 178,947,912 $ 181,014,653 Non interest bearing 50,250,117 43,293,423 Total deposits 229,198, ,308,076 Long term debt 9,000,000 9,000,000 Accrued expenses and other liabilities 1,097,880 1,370,786 Total liabilities 239,295, ,678,862 Stockholders' equity Common stock (voting; par value $0.20 per share; 1,000,000 shares authorized and 734,137 shares issued and 520,626 and 520,524 outstanding, respectively) 146, ,827 Additional paid in capital 2,904,092 2,901,964 Retained earnings 36,642,198 35,080,000 Accumulated other comprehensive (loss) income (34,606) 355,740 Common stock in treasury, at cost (213,511 and 213,613 shares, respectively) (9,072,605) (9,076,939) Total stockholders' equity 30,585,906 29,407,592 Total liabilities and stockholders' equity $ 269,881,815 $ 264,086,454 See the accompanying notes to the consolidated financial statements. 5

8 Consolidated Statements of Income Years ended December 31, Interest Income Loans, including fees $ 10,224,643 $ 9,691,411 Investment securities 757, ,217 Federal funds sold 16,848 3,370 Total interest income 10,999,157 10,513,998 Interest Expense Deposits 914,317 1,112,040 Long term debt 246, ,335 Total interest expense 1,161,043 1,373,375 Net interest income 9,838,114 9,140,623 Provision for loan losses 380, ,000 Net interest income after provision for loan losses 9,458,114 8,990,623 Noninterest Income Service charges and other fees 1,918,945 1,877,003 Trust fees 152, ,706 Other operating income 131,183 94,124 Total noninterest income 2,203,011 2,203,833 Noninterest Expense Salaries and employee benefits 4,601,672 4,552,775 Occupancy and equipment 1,110,345 1,073,632 ATM expenses 250, ,753 Director fees 248, ,375 Business Manager 176, ,553 Administrative fees 160, ,348 Professional fees 150, ,511 Postage and shipping 148, ,955 Regulatory fees 141, ,700 Other operating 671, ,413 Total noninterest expense 7,660,235 7,304,015 Income Before Provision for Income Taxes 4,000,890 3,890,441 Provision for income taxes 200, ,000 Net Income $ 3,800,890 $ 3,670,441 Earnings per Share $ 7.28 $ 7.03 See the accompanying notes to the consolidated financial statements. 6

9 Consolidated Statements of Comprehensive Income Years ended December 31, Net income $ 3,800,890 $ 3,670,441 Other comprehensive income: Unrealized gains on securities available for sale: Unrealized holding (losses) gains arising during the period, net of tax of $27,136 and ($18,183), respectively (390,346) 261,558 Less: reclassification adjustment for gains included in net income, net of tax of $0 and $808, respectively 11,627 Total other comprehensive (loss) income (390,346) 273,185 Total comprehensive income $ 3,410,544 $ 3,943,626 See the accompanying notes to the consolidated financial statements. 7

10 Consolidated Statements of Stockholders Equity Accumulated Additional Other Common Paid in Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock Total Balance at December 31, 2014 $ 146,827 $ 2,901,931 $ 33,624,298 $ 82,555 $ (8,916,064) $ 27,839,547 Comprehensive income Net income 3,670,441 3,670,441 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effect 273, ,185 Total comprehensive income 3,670, ,185 3,943,626 Common stock purchased (2,515 shares) (160,960) (160,960) Treasury stock issued (2 shares) Cash dividends paid ($4.25 per share) (2,214,739) (2,214,739) Balance at December 31, ,827 2,901,964 35,080, ,740 (9,076,939) 29,407,592 Comprehensive income Net income 3,800,890 3,800,890 Change in net unrealized gain on securities available for sale, net of reclassification adjustment and tax effect (390,346) (390,346) Total comprehensive income (loss) 3,800,890 (390,346) 3,410,544 Treasury stock issued (102 shares) 2,128 4,334 6,462 Cash dividends paid ($4.30 per share) (2,238,692) (2,238,692) Balance at December 31, 2016 $ 146,827 $ 2,904,092 $ 36,642,198 $ (34,606) $ (9,072,605) $ 30,585,906 See the accompanying notes to the consolidated financial statements. 8

11 Consolidated Statements of Cash Flows Years ended December 31, Cash flow from operating activities Net income $ 3,800,890 $ 3,670,441 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 380, ,000 Net amortization of securities 94, ,237 Depreciation 252, ,983 Realized gain on available for sale securities, net (12,435) Gain on sale of foreclosed assets, net (2,486) Loss on disposal of fixed assets 6,927 Bank owned life insurance income (106,198) (63,600) Deferred income tax expense (benefit) 19,435 (4,742) Change in operating assets and liabilities: Accrued interest receivable (96,553) 21,525 Other assets (63,521) (3,984) Accrued expenses and other liabilities 724,594 (379,054) Net cash provided by operating activities 5,005,926 3,809,812 Cash flows from investing activities Proceeds from calls, maturities and prepayments of securities, available for sale 7,738,971 9,396,200 Proceeds from sales of securities, available for sale 248,062 Purchases of securities, available for sale (6,566,601) (2,278,851) Purchases of other securities, at cost (5,800) (70,300) Loan originations and principal collections, net (1,809,993) (15,989,459) Purchase of bank owned life insurance (3,000,000) Additions to premises and equipment (110,235) (120,150) Proceeds from the sale of foreclosed assets 25, ,228 Net cash used in investing activities (728,658) (11,653,270) Cash flow from financing activities Net increase in deposits 4,889,953 3,205,986 Proceeds from long term debt 2,000,000 Proceeds from sale of treasury stock 6, Repurchase of common stock (160,960) Dividends paid on common stock (2,238,692) (2,214,739) Net cash provided by financing activities 2,657,723 2,830,405 Net Increase (Decrease) in Cash and Cash Equivalents 6,934,991 (5,013,053) Cash and Cash Equivalents, Beginning of year 10,106,346 15,119,399 Cash and Cash Equivalents, End of year $ 17,041,337 $ 10,106,346 Continued See the accompanying notes to the consolidated financial statements. 9

12 Consolidated Statements of Cash Flows (Continued) Years ended December 31, Supplementary Cash Flow Information Interest paid on deposits and borrowed funds $ 1,182,514 $ 1,407,284 Income taxes paid $ 222,572 $ 217,143 Schedule of Noncash Investing and Financing Activities Foreclosure of assets $ $ 164,849 See the accompanying notes to the consolidated financial statements. 10

13 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation RBC, Inc. & Subsidiary The consolidated financial statements include the accounts of RBC, Inc. (the Company) and its wholly owned subsidiary, Robertson Banking Company (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. Nature of Operations The Company provides a variety of financial services to individuals and small businesses through its offices in Marengo County and Tuscaloosa, Alabama. Its primary deposit products are certificate of deposits, demand deposits, and savings accounts and its primary lending products are loans collateralized by real estate and commercial and industrial loans. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Significant Group Concentrations of Credit Risk Most of the Company s activities are with customers located in the Marengo and Tuscaloosa Counties, Alabama region. Notes 2 and 16 discuss the types of securities in which the Company invests. Note 3 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer. Cash and Cash Equivalents For the purpose of presentation in the consolidated statements of cash flows, the Company considers cash and highly liquid investments with maturities of three months or less when purchased as cash and cash equivalents. Cash and cash equivalents consist of cash, due from banks, and federal funds sold at December 31, 2016 and Reclassification Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. 11

14 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in earnings. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Other Securities The Company, as a member of the Federal Home Loan Bank (FHLB) Atlanta system, is required to maintain an investment in capital stock of the FHLB. Based on the redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. The Company also holds First National Bankers Bank (FNBB) stock. Based on the redemption provisions of the FNBB, the stock has no quoted market value and is carried at cost. Management reviews for impairment based on the ultimate recoverability of the cost basis of other securities. Loans The Company grants residential and commercial real estate, commercial and industrial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by real estate loans throughout Marengo County and surrounding areas. The ability of the Company s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued in the unpaid balance. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees are deferred and amortized as a level yield adjustment over the respective term of the loan. The accrual of interest on the loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Loans are typically charged off not later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. 12

15 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans (continued) All interest accrued but not collected for loans that are placed on non accrual or charged off is reversed against interest income. The interest on these 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. 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 collectibility 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 allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical charge off experience. Other adjustments may be made to the allowance for pools of loans after an assessment of internal and external influence on credit quality that are not fully reflected in the historical loss or risk rating data. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls are considered 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 by either the present value of expected future cash flows discounted at the loan s effective interest rate, the loan s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. 13

16 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Off balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Company has entered into commitments to extend credit, including unfunded commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Premises and Equipment Land is carried at cost. Bank premises and furniture, fixtures and equipment are carried at cost, less accumulated depreciation computed on the straight line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against earnings as incurred. Costs of major additions and improvements are capitalized. Upon disposition or retirement of property, the asset account is relieved of the cost of the item and the allowance for depreciation is charged with accumulated depreciation. Any resulting gain or loss is current income. Bank owned life insurance The Company purchased single premium life insurance on certain employees of the Bank. Appreciation in value of the insurance policies is classified as noninterest income. Foreclosed Assets Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations are included in net expenses from foreclosed assets. Foreclosed assets totaled $235,000 and $276,849 at December 31, 2016 and 2015, respectively, and are included in other assets. Long lived Assets The Company reviews long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. Long lived assets and certain intangibles to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. 14

17 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company, with the consent of its stockholders, elected to be considered an S Corporation under the Internal Revenue Code (IRC). Instead of paying corporate income taxes, the stockholders of an S Corporation are taxed individually on their proportionate share of the Company s taxable income. The state of Alabama requires financial institutions to pay a franchise tax on net taxable income. The Company follows accounting requirements associated with uncertainty in income taxes using the provisions of Financial Accounting Standards Board (FASB) ASC 740, Income Taxes. The guidance prescribes a minimum recognition threshold and measurement methodology that a tax position taken or expected to be taken in a tax return is required before being recognized in the financial statements. It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2016 and 2015, the Company has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. With a few exceptions, the Company is no longer subject to income tax examinations by federal and state authorities for the years ended December 31, 2012 and prior. Treasury Stock Common stock shares repurchased are recorded as treasury stock at cost. Stock Compensation Stock compensation accounting guidance (FASB ASC 718, Compensation Stock Compensation) requires that the compensation cost related to share based payment transactions be recognized in financial statements. That cost will be measured based on the grant date of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of sharebased compensation arrangements including stock options, restricted share plans, performancebased awards, share appreciation rights and employee share purchase plans. The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees service period, generally defined as the vesting period. For awards with grade vesting, compensation cost is recognized on a straight line basis over the requisite service period for the entire award. Earnings Per Share Basic earnings per share represent income available to common stockholders divided by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding used to calculate earnings per share was 522,037 and 521,776 for the years ended December 31, 2016 and 2015, respectively. 15

18 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in note 16. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates. Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $111,983 and $122,400 for the years ended December 31, 2016 and 2015, respectively. Compensated Absences Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classifications, length of service, and other factors. It is impractical to estimate the amount of compensation for future absences, and, accordingly, no liability has been recorded in the accompanying financial statements. The Company s policy is to recognize the costs of compensated absences when actually paid to employees. Subsequent Events The Company evaluated all events or transactions that occurred after December 31, 2016 through February 8, 2017, the date the Company issued these financial statements. During this period, the Company did not have any material recognizable subsequent events that required recognition in the disclosures to the December 31, 2016 financial statements. Recently Issued Accounting Standards In June 2016, the FASB issued ASU , Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments (the ASU), which introduces the current expected credit losses methodology. Among other things, the ASU requires the measurement of all expected credit losses for financial assets, including available for sale debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire life. ASU also requires the allowance for credit losses for purchased financial assets with credit deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Disaggregation by vintage will be optional for nonpublic business entities. Institutions are to apply the changes through a cumulative effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, Early application will be permitted for fiscal years beginning after December 15, The Company is currently evaluating the impact of these amendments on the consolidated financial statements. 16

19 NOTE 2 SECURITIES The amortized cost and fair value of securities, with gross unrealized gains and losses, follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 2016 Securities available for sale: Municipal securities $ 19,989,884 $ 139,386 $ (181,569) $ 19,947,701 U.S. Government securities 6,388,953 21,952 (15,430) 6,395,475 Mortgage backed securities 3,226,626 30,864 (27,008) 3,230,482 Corporate securities 806,381 3,197 (8,403) 801,175 $ 30,411,844 $ 195,399 $ (232,410) $ 30,374,833 December 31, 2015 Securities available for sale: Municipal securities $ 18,444,287 $ 315,895 $ (10,510) $ 18,749,672 U.S. Government securities 9,594,434 57,997 (17,444) 9,634,987 Mortgage backed securities 2,566,977 42,902 (1,317) 2,608,562 Corporate securities 1,072, (7,466) 1,065,765 $ 31,678,515 $ 417,208 $ (36,737) $ 32,058,986 Other securities on the balance sheet is comprised of $619,600 and $613,800 in FHLB stock at December 31, 2016 and 2015, respectively. Also included within other securities is $700,000 of FNBB stock at December 31, 2016 and Securities with a carrying value of approximately $16,905,289 and $13,400,477 at December 31, 2016 and 2015, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The amortized cost and fair values of debt securities by contractual maturity at December 31, 2016 follows: Available for Sale Amortized Fair Cost Value Within one year $ 2,395,250 $ 2,399,423 Over one year through five years 13,994,116 14,028,924 After five years through fifteen years 10,795,852 10,716,004 27,185,218 27,144,351 Mortgage backed securities 3,226,626 3,230,482 $ 30,411,844 $ 30,374,833 17

20 NOTE 2 SECURITIES (Continued) There were no proceeds from sales of securities available for sale in For the year ended December 31, 2015, proceeds from sales of securities available for sale amounted to $248,062 with gross realized gains of $12,435. Temporarily Impaired Securities The following table shows the gross unrealized losses and fair value of the Company s investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: Less Than 12 Months Unrealized Fair Value Loss 12 Months or More Unrealized Fair Value Loss Total Unrealized Fair Value Loss December 31, 2016 Securities available for sale: Municipal securities $ 12,018,173 $ (181,569) $ $ $ 12,018,173 $ (181,569) U.S. Government securities 2,582,504 (15,430) 2,582,504 (15,430) Mortgage backed securities 1,139,356 (27,008) 1,139,356 (27,008) Corporate securities 296,003 (8,403) 296,003 (8,403) $ 16,036,036 $ (232,410) $ $ $ 16,036,036 $ (232,410) December 31, 2015 Securities available for sale: Municipal securities $ 2,082,756 $ (9,118) $ 185,546 $ (1,392) $ 2,268,302 $ (10,510) U.S. Government securities 1,243,964 (6,037) 1,488,426 (11,407) 2,732,390 (17,444) Mortgage backed securities 270,699 (1,317) 270,699 (1,317) Corporate securities 815,353 (7,466) 815,353 (7,466) $ 4,412,772 $ (23,938) $ 1,673,972 $ (12,799) $ 6,086,744 $ (36,737) 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 Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 18

21 NOTE 2 SECURITIES (Continued) Municipal Securities The unrealized losses on the eleven investments in Municipal Securities were caused by the current interest rate environment. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investment and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at December 31, U.S. Government Securities The unrealized loss on the seven investments in U.S. Government obligations and direct obligations of U.S. Government agencies was caused by the current interest rate environment. The contractual terms of the investment does not permit the issuer to settle the security at a price less than the amortized cost bases of the investment. Because the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider the investment to be other than temporarily impaired at December 31, Mortgage Backed Securities The unrealized losses on the Company s investment in two mortgage backed securities were caused by the current interest rate environment. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company s investments. Because the decline in market value is attributable to the current interest rate environment and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at December 31, Corporate Securities The Company s unrealized losses on investments in three corporate bonds relate to an investment in a company within the financial services sector. The unrealized losses are primarily caused by the current interest rate environment. The contractual terms of the investments do not permit the issuer to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect the amounts due according to the contractual terms of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of the par value, which may be maturity, it does not consider these investments to be other than temporarily impaired at December 31, In 2016 and 2015, the Company recognized no other than temporary losses. 19

22 NOTE 3 LOANS The composition of the loan portfolio by portfolio segment was as follows: December 31, Real estate Secured by 1 4 family residential properties $ 76,165,764 $ 72,136,566 Secured by nonfarm, nonresidential properties 59,999,023 60,619,795 Secured by multi family residential properties 18,791,744 22,755,026 Farmland 16,398,944 17,674,259 Construction, land development and other land 3,170,898 1,204,068 Commercial and industrial 27,855,314 27,973,681 Consumer 5,896,688 6,220,202 Tax free municipal 2,976,693 1,854,752 Other 1,774,538 2,193,932 Total loans 213,029, ,632,281 Less: Unearned interest and fees (315,718) (242,931) Allowance for loan losses (2,010,684) (2,118,639) Net loans $ 210,703,204 $ 210,270,711 The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 82% and 83% of the portfolio is concentrated in loans secured by real estate as of December 31, 2016 and 2015, respectively. Residential and Commercial Real Estate Loans Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company s board of directors (the Board ). Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Construction loans to borrowers are to finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on site inspections and requires the receipt of loan waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and 20

23 NOTE 3 LOANS (Continued) guarantors, the amount of the borrower s equity on the project, independent appraisals, cost estimates and pre construction sale information. The Company also makes loans on occasion for the purchase of land for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof. Farm loans are generally made to farmers for various purposes related to crops, livestock, related equipment/machinery, and other farm operations. Repayment is primarily dependent on the personal income of the borrower(s) and income from farming operations, which can be impacted by economic and other market conditions. As a general practice, the Company takes as collateral a security interest in the underlying crops, livestock, equipment, etc. Such loans are monitored via inspections and/or evaluations, as applicable. Commercial and Industrial Commercial loans are primarily underwritten on the basis of the borrowers ability to service debt from income. The cash flow of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by shortterm assets whereas long term loans are primarily secured by long term assets. Consumer Consumer loans are extended for various purposes, including purchases of automobiles, recreation vehicles, and boats. The Company also offers home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to five years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Tax Free Municipal Loans These are obligations supported by the full, faith and credit of the obligor which is a type of city, state, or other political subdivision. Collateral for these loans generally consists of a promise to pay from monies allocated to a special fund established to service the debt or an otherwise unconditional promise to cover all required payments on the obligation. 21

24 NOTE 3 LOANS (Continued) An analysis of the change in allowance for loan losses is as follows: Commercial and Industrial Tax Free Municipal Other Total Real Estate Consumer December 31, 2016 Beginning balance $ 1,837,980 $ 217,130 $ 44,203 $ 6,849 $ 12,477 $ 2,118,639 Provision for loan losses 369,552 1, , ,000 Charge offs (431,054) (195,281) (19,729) (4,755) (650,819) Recoveries 28, ,196 15,033 1, ,864 $ 1,804,913 $ 141,298 $ 39,860 $ 15,613 $ 9,000 $ 2,010,684 Individually evaluated for impairment: Recorded investment $ 1,765,232 $ $ $ $ $ 1,765,232 Balance in allowance for loan losses 293, ,076 Collectively evaluated for impairment: Recorded investment 172,761,141 27,855,314 5,896,688 2,976,693 1,774, ,264,374 Balance in allowance for loan losses 1,511, ,298 39,860 15,613 9,000 1,717,608 Total evaluated for impairment: Recorded investment 174,526,373 27,855,314 5,896,688 2,976,693 1,774, ,029,606 Balance in allowance for loan losses 1,804, ,298 39,860 15,613 9,000 2,010,684 December 31, 2015 Beginning balance $ 1,867,241 $ 182,850 $ 40,872 $ 5,230 $ 4,997 $ 2,101,190 Provision for loan losses (30,284) 144,977 26,208 1,619 7, ,000 Charge offs (76,394) (168,683) (44,077) (289,154) Recoveries 77,417 57,986 21, ,603 $ 1,837,980 $ 217,130 $ 44,203 $ 6,849 $ 12,477 $ 2,118,639 Individually evaluated for impairment: Recorded investment $ 1,011,487 $ 313,915 $ $ $ $ 1,325,402 Balance in allowance for loan losses 167,649 55, ,373 Collectively evaluated for impairment: Recorded investment 173,378,227 27,659,766 6,220,202 1,854,752 2,193, ,306,879 Balance in allowance for loan losses 1,670, ,406 44,203 6,849 12,477 1,895,266 Total evaluated for impairment: Recorded investment 174,389,714 27,973,681 6,220,202 1,854,752 2,193, ,632,281 Balance in allowance for loan losses 1,837, ,130 44,203 6,849 12,477 2,118,639 22

25 NOTE 3 LOANS (Continued) The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as watch or lower are reviewed monthly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as when a loan becomes past due, the Company will determine the appropriate loan grade. Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard, doubtful or even charge off. Internally assigned loan grades are defined as follows: 1. Loans with virtually no risk. Such loans to be 100% collateralized by Company held deposit accounts or Certificates of Indebtedness issued by government or Treasury securities. 2. Loans with little, if any risk. This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Company policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind). 3. Loans with less than average risk. Such loans meet or exceed the Company s guidelines, have a definite repayment agreement, and are repaid as agreed. Generally, such loans would be well collateralized loans to financially sound borrowers with significant liquid assets and no negative credit history. 4. Loans with average risk. Such loans may be adequately collateralized loans to capable borrowers as demonstrated by written financial statement or absence of both excessive negative credit history and payment delinquency, or unsecured loans to borrowers of sufficient financial position and demonstrated ability to service the amount borrowed. 5. Loans with acceptable risk that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. 6. Special Mention Loans with greater than average risk. Such loans have potential weaknesses that deserve management s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company s credit position at some future date. 23

26 NOTE 3 LOANS (Continued) 7. Substandard Loans with substantial risk. Such loans are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well defined weakness or weaknesses that jeopardize the liquidation of the debt; they may be characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. 8. Doubtful Loans with significant risk. Such loans have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently known facts, conditions and values, highly questionable and improbable. 9. Loss Loans with little potential for collection. Such loans are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be affected in the future. The table below illustrates the carrying amount of loans by credit quality indicator: Pass 1 5 Special Mention 6 Substandard 7 Total December 31, 2016 Real estate Secured by 1 4 family residential properties $ 74,303,534 $ 859,820 $ 1,002,410 $ 76,165,764 Secured by nonfarm, nonresidential properties 55,762,450 3,262, ,740 59,999,023 Secured by multi family residential properties 18,542, ,709 18,791,744 Farmland 16,079, ,294 16,398,944 Construction, land development and other land 3,170,898 3,170,898 Commercial and industrial 27,633,580 33, ,719 27,855,314 Consumer 5,851,213 16,357 29,118 5,896,688 Tax free municipal 2,976,693 2,976,693 Other 1,774,538 1,774,538 $ 206,094,591 $ 4,491,319 $ 2,443,696 $ 213,029,606 24

27 NOTE 3 LOANS (Continued) Pass 1 5 Special Mention 6 Substandard 7 Total December 31, 2015 Real estate Secured by 1 4 family residential properties $ 69,876,883 $ 1,385,312 $ 874,371 $ 72,136,566 Secured by nonfarm, nonresidential properties 55,707,609 4,400, ,944 60,619,795 Secured by multi family residential properties 21,869, , ,582 22,755,026 Farmland 17,339, ,324 27,787 17,674,259 Construction, land development and other land 1,204,068 1,204,068 Commercial and industrial 26,265,794 1,342, ,871 27,973,681 Consumer 6,181,776 16,962 21,464 6,220,202 Tax free municipal 1,854,752 1,854,752 Other 2,193,932 2,193,932 $ 202,493,857 $ 8,072,405 $ 2,066,019 $ 212,632,281 The following table provides an aging analysis of past due loans and nonaccrual loans: Accruing Loans Greater than 90 Non Current Days Days Total Accrual Loans Total December 31, 2016 Real estate Secured by 1 4 family residential $ 591,343 $ 104,036 $ 695,379 $ 9,295 $ 75,461,090 $ 76,165,764 Secured by nonfarm, nonresidential 351, , ,780 58,915,981 59,999,023 Secured by multi family residential 18,791,744 18,791,744 Farmland 16,398,944 16,398,944 Construction, land development and other land 3,170,898 3,170,898 Commercial and industrial 5,269 5,269 27,850,045 27,855,314 Consumer 35,349 35,349 19,547 5,841,792 5,896,688 Tax free municipal 2,976,693 2,976,693 Other 1,774,538 1,774,538 $ 983,223 $ 104,036 $ 1,087,259 $ 760,622 $ 211,181,725 $ 213,029,606 25

28 NOTE 3 LOANS (Continued) Accruing Loans Greater than 90 Non Current Days Days Total Accrual Loans Total December 31, 2015 Real estate Secured by 1 4 family residential $ 745,991 $ $ 745,991 $ 26,426 $ 71,364,149 $ 72,136,566 Secured by nonfarm, nonresidential 14,258 60,605,537 60,619,795 Secured by multi family residential 264,582 22,490,444 22,755,026 Farmland 33,982 33, ,502 17,492,775 17,674,259 Construction, land development and other land 1,204,068 1,204,068 Commercial and industrial 6,249 6,249 27,967,432 27,973,681 Consumer 4,601 4,601 16,299 6,199,302 6,220,202 Tax free municipal 1,854,752 1,854,752 Other 2,193,932 2,193,932 $ 790,823 $ $ 790,823 $ 469,067 $ 211,372,391 $ 212,632,281 The following is a summary of information pertaining to impaired loans: With no Related Allowance Recorded With an Allowance Recorded Unpaid Unpaid Contractual Contractual Recorded Principal Recorded Principal Related Investment Balance Investment Balance Allowance December 31, 2016 Real estate $ 609,061 $ 609,061 $ 1,741,036 $ 1,741,036 $ 293,076 Commercial and industrial 188, , Consumer 29,118 29,118 29,118 $ 609,061 $ 609,061 $ 1,958,873 $ 1,958,873 $ 323,138 December 31, 2015 Real estate $ 597,345 $ 597,345 $ 1,081,340 $ 1,081,340 $ 172,810 Commercial and industrial 147, , , ,367 55,982 Consumer 21,464 21, $ 744,848 $ 744,848 $ 1,321,171 $ 1,321,171 $ 228,923 26

29 NOTE 3 LOANS (Continued) A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC ), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows: Average Interest Interest Recorded Income Income Investment Recognized Received December 31, 2016 Real estate $ 2,588,217 $ 126,313 $ 93,831 Commercial and industrial 188,719 15,897 17,299 Consumer 29,118 2,980 3,590 $ 2,806,054 $ 145,190 $ 114,720 December 31, 2015 Real estate $ 1,715,833 $ 98,158 $ 93,093 Commercial and industrial 409,193 29,751 29,103 Consumer 27,399 2,215 2,148 $ 2,152,425 $ 130,124 $ 124,344 There were no troubled debt restructurings during the year ended December 31, Troubled debt restructurings entered into during the year ended December 31, 2015 were as follows: Number of Contracts Pre Modification Post Modification December 31, 2015 Outstanding recorded investment Commercial and industrial Modified amortization and interest rates 1 $ 155,924 $ 155,924 Net loans 1 $ 155,924 $ 155,924 At December 31, 2016 and 2015, there were no commitments to lend additional funds to any borrower whose loan terms have been modified in a troubled debt restructuring. 27

30 NOTE 4 PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of premises and equipment follows: December 31, Bank premises $ 5,782,147 $ 5,752,197 Furniture, fixtures, and equipment 3,367,363 3,324,142 9,149,510 9,076,339 Accumulated depreciation (4,484,550) (4,268,636) Premises and equipment, net $ 4,664,960 $ 4,807,703 Depreciation expense for the years ended December 31, 2016 and 2015 amounted to $252,978 and $263,983, respectively. NOTE 5 DEPOSITS The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2016 and 2015 was $15,579,592 and $14,870,285, respectively. The scheduled maturities of time deposits as of December 31, 2016 were as follows: Maturity Schedule 2017 $ 32,975, ,041, ,377, ,846, ,361,817 $ 75,602,850 NOTE 6 LONG TERM DEBT December 31, FHLB borrowings; varying interest rates (ranging from 0.96% to 4.74% at December 31, 2016 and 2015); due in various years beginning in 2017 through 2023; collateralized by a blanket lien on the Bank s 1 to 4 family residential mortgage loans totaling $57,665,606 and $54,895,813 as of December 31, 2016 and 2015, respectively. $ 9,000,000 $ 9,000,000 28

31 NOTE 6 LONG TERM DEBT (Continued) RBC, Inc. & Subsidiary The Company has established credit availability in the amount of 92% of the Company s eligible collateral with the FHLB of Atlanta. As of December 31, 2016, the Company would be able to access an additional $40,128,484 of FHLB credit products based on the Company s current financial and operational conditions and the pledging of sufficient collateral. At December 31, 2016, the Company also had three unsecured federal funds lines of credit with other financial institutions enabling the Company to borrow up to $17,900,000, with interest determined at the time of the draw. The arrangements are reviewed annually for renewal of each credit line. The scheduled maturities of long term debt as of December 31, 2016 were as follows: Due in 2017 $ 2,000,000 Due in ,000,000 Due in 2021 and thereafter 6,000,000 $ 9,000,000 NOTE 7 INCOME TAXES Allocation of state income taxes between current and deferred portions is as follows: Years ended December 31, Current tax provision State $ 180,565 $ 224,742 Deferred tax expense (benefit) 19,435 (4,742) $ 200,000 $ 220,000 The provision for state income taxes differs from that computed by applying statutory rates to income before income tax expense primarily due to tax exempt interest income and other nondeductible expenses. 29

32 NOTE 7 INCOME TAXES (Continued) The components of net deferred tax assets and liabilities, included in other assets, are as follows: December 31, Deferred tax assets Provision for loan losses $ 130,694 $ 137,712 Net unrealized losses on securities available for sale 2, , ,712 Deferred tax liabilities Net unrealized gains on securities available for sale (24,731) Depreciation (40,217) (27,800) (40,217) (52,531) $ 92,883 $ 85,181 NOTE 8 PROFIT SHARING PLAN The Company offers the benefit of participating in a 401(k) profit sharing plan (Plan) to eligible employees. The Company makes a safe harbor non elective contribution to the account of each eligible employee in an amount equal to 3% of the employee s compensation for the plan year. The Company may also make profit sharing contributions at its discretion, which will be allocated all eligible employees. All Company contributions are subject to certain limitations set by law. For the years ended December 31, 2016 and 2015, expense attributable to the Plan amounted to $219,450 and $210,900, respectively. NOTE 9 STOCK INCENTIVE PLANS In March of 2012 the Company established a stock incentive plan for certain key employees that provides for the granting of restricted stock, incentive and performance shares. The total number of shares of stock subject to issuance under the plan may not exceed 10,000 shares. The Board of Directors determines the terms of the restricted stock granted. Performance shares awarded annually are subject to a calculation based on amounts and ratios reflected in the call report of the Company at calendar year end and are subject to any adjustments determined by the Board of Directors. As of the year ended December 31, 2016 and 2015, performance shares of 730, have been awarded to employees since the inception of the stock incentive plan. 30

33 NOTE 9 STOCK INCENTIVE PLANS (Continued) RBC, Inc. & Subsidiary The following is a summary of transactions within the plan during the years ended December 31, 2016 and 2015: Number of Shares Weighted Average Price Per Share Weighted Average Intrinsic Value December 31, 2016 Non vested shares, beginning of period 730 $ $ 39,119 Vested ,677 Non vested shares, end of period 180 $ $ 10,440 December 31, 2015 Non vested shares, beginning of period 730 $ $ 39,119 Vested Non vested shares, end of period 730 $ $ 39,119 Weighted average intrinsic value per share granted during 2014 $ There was $27,432 of total unrecognized compensation expense related to the unvested shares as of December 31, 2016 and NOTE 10 OFF BALANCE SHEET ACTIVITIES The Company is a party to credit related financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on balance sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk: December 31, Unfunded commitments under lines of credit $ 24,156,558 $ 16,080,769 Standby letters of credit 2,517,094 2,737,594 31

34 NOTE 10 OFF BALANCE SHEET ACTIVITIES (Continued) RBC, Inc. & Subsidiary Unfunded commitments under lines of credit 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. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management s credit evaluation of the customer. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE 11 LEGAL CONTINGENCIES Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company s consolidated financial statements. NOTE 12 MINIMUM REGULATORY CAPITAL REQUIREMENTS Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel Ill rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi year schedule, and fully phased in by January 1, The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of December 31, 2015, the Company and Bank meet all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2016 and 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. 32

35 NOTE 12 MINIMUM REGULATORY CAPITAL REQUIREMENTS (Continued) The Company s and the Bank s actual capital amounts and ratios as of December 31, 2016 and 2015 are also presented in the following table: Minimum To Be Well Capitalized Under Prompt Corrective Action Actual Capital Requirement Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) December 31, 2016 Total capital to risk weighted assets Company $ 32, % $ 15, % N/A N/A Bank 31, % 15, % 19, % Tier 1 capital to risk weighted assets Company 30, % 7, % N/A N/A Bank 29, % 7, % 11, % Common Tier 1 to risk weighted assets Company 30, % 8, % N/A N/A Bank 29, % 8, % 12, % Tier 1 capital to average assets Company 30, % 10, % N/A N/A Bank 29, % 10, % 13, % December 31, 2015 Total capital to risk weighted assets Company $ 29, % $ 15, % N/A N/A Bank 30, % 15, % 18, % Tier 1 capital to risk weighted assets Company 27, % 7, % N/A N/A Bank 28, % 7, % 11, % Common Tier 1 to risk weighted assets Company 27, % 8, % N/A N/A Bank 28, % 8, % 12, % Tier 1 capital to average assets Company 27, % 10, % N/A N/A Bank 28, % 10, % 13, % 33

36 NOTE 13 CONCENTRATIONS AND CASH RESERVE REQUIREMENTS RBC, Inc. & Subsidiary At various times throughout the year, the Company maintained cash balances with financial institutions that exceeded federally insured limits. The Company monitors the capital adequacy of these financial institutions on a quarterly basis. The Company is required to maintain certain cash reserves relating to its deposit liabilities. This reserve requirement is ordinarily satisfied by cash on hand. NOTE 14 STOCKHOLDERS EQUITY The Company and the Bank is subject to certain restrictions on the amount of dividends that they may declare without regulatory approval. NOTE 15 RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has granted loans to principal officers and directors and their affiliates. Annual activity consisted of the following: Beginning balance $ 2,945,157 $ 1,676,879 New loans 2,477,453 3,499,731 Repayments (2,466,343) (2,231,453) Ending balance $ 2,956,267 $ 2,945,157 Standby letters of credit granted to principal officers and directors and their affiliates consisted of $1,575,000 and $1,820,000 at December 31, 2016 and 2015, respectively. Deposits from related parties held by the Company amounted to $1,958,512 and $2,600,632 at December 31, 2016 and 2015, respectively. NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES FASB ASC 825, Financial Instruments, permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a Company commitment. Subsequent changes must be recorded in earnings. 34

37 NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES (Continued) RBC, Inc. & Subsidiary FASB ASC 820, Fair Value Measurement, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance 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: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following describes valuation methodologies used for assets measured at fair value: Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include certain residual interests in securitizations and other less liquid securities. 35

38 NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES (Continued) RBC, Inc. & Subsidiary Impaired Loans. A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company's management related to values of properties in the Company's market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Management s unobservable inputs resulted in a quantitative range decrease of 6% 9%, depending on the respective collateral. Accordingly, fair value estimates for impaired loans are classified as Level 3. Foreclosed Assets. Estimates of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company's senior lending officers related to values of properties in the Company's market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Management s unobservable inputs resulted in a quantitative range decrease of 6% 9%, depending on the respective foreclose asset. Accordingly, the fair values estimates for foreclosed real estate are classified as Level 3. Assets measured at fair value on a recurring basis are summarized below: Fair Value Measurements at Reporting Date Using Significant Other Significant Quoted Observable Observable Prices Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2016 Municipal securities $ 19,947,701 $ $ 19,947,701 $ U.S. Government securities 6,395,475 6,395,475 Mortgage backed securities 3,230,482 3,230,482 Corporate securities 801, ,175 December 31, 2015 Municipal securities $ 18,749,672 $ $ 18,749,672 $ U.S. Government securities 9,634,987 9,634,987 Mortgage backed securities 2,608,562 2,608,562 Corporate securities 1,065,765 1,065,765 36

39 NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES (Continued) RBC, Inc. & Subsidiary Assets measured at fair value on a nonrecurring basis are summarized below: Fair Value Measurements at Reporting Date Using Significant Other Significant Quoted Observable Observable Prices Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) December 31, 2016 Impaired loans: Real estate $ 1,447,960 $ $ $ 1,447,960 Commercial 187, ,775 Foreclosed assets: Commercial real estate 235, ,000 December 31, 2015 Impaired loans: Real estate $ 908,530 $ $ $ 908,530 Commercial 162, ,385 Consumer 21,333 21,333 Foreclosed assets: Commercial real estate 235, ,000 Residential real estate 41,849 41,849 The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amounts of cash and short term instruments approximate fair values. Securities Fair values for securities are based on the framework for measuring fair value. Other Securities The fair value of these securities is based on their redemption values. 37

40 NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES (Continued) Loans RBC, Inc. & Subsidiary For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one to four family residential) and other consumer loans are based on quoted market price of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Bank Owned Life Insurance Bank owned life insurance contracts are carried at the total cash surrender value of all policies as of the report date. For disclosure purposes, the carrying value is a reasonable estimate of fair value. Deposits The fair values disclosed for non interest bearing demand deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Interest bearing demand deposit (e.g. NOW, savings, and money market accounts) fair values are based on the estimated discounted cash flow calculation the assuming a life of ten years at the interest rate as of the reporting date. Fair values for other deposits (e.g., variable and fixed rate certificates of deposit) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected monthly maturities. Long term Debt The fair values of the Company s long term debt are estimated using discounted cash flow analyses based on the Company s current incremental borrowing rates for similar types of borrowing arrangements. Accrued Interest The carrying amount of accrued interest approximates fair value. 38

41 NOTE 16 FAIR VALUE OF ASSETS AND LIABILITIES (Continued) RBC, Inc. & Subsidiary The estimated fair values, and related carrying or notional amounts, of the Company s financial instruments are as follows: Carrying Amount Fair Value December 31, 2016 Financial assets: Cash and cash equivalents $ 17,041,337 $ 17,041,337 Securities available for sale 30,374,833 30,374,833 Other securities, at cost 1,319,600 1,319,600 Loans, net 210,703, ,239,657 Accrued interest receivable 1,127,244 1,127,244 Bank owned life insurance 3,753,814 3,753,814 Financial liabilities: Deposits 229,198, ,735,636 Long term debt 9,000,000 9,269,633 Accrued interest payable 107, ,064 December 31, 2015 Financial assets: Cash and cash equivalents $ 10,106,346 $ 10,106,346 Securities available for sale 32,058,986 32,058,986 Other securities, at cost 1,313,800 1,313,800 Loans, net 210,270, ,165,576 Accrued interest receivable 1,030,691 1,030,691 Bank owned life insurance 3,647,616 3,647,616 Financial liabilities: Deposits 224,308, ,284,941 Long term debt 9,000,000 9,430,405 Accrued interest payable 123, ,775 39

42 BOARD OF DIRECTORS RBC, INC. Joe Bradley Chairman of the Board William Gary Holemon President and CEO James W. Bird, Jr. W. W. Dinning, Jr. Albert H. Garrett Director Director Director Richard E. Gibson G. Kim Mayton Hugh V. Overmyer Director Director Director R. A. Pritchett Jason C. Walker John B. Wallace Director Director Director