Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 7, 2018

 

 

EQUITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Kansas   001-37624   72-1532188

(State or other jurisdiction

of incorporation or organization)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

7701 East Kellogg Drive, Suite 300

Wichita, KS

    67207
(Address of principal executive offices)     (Zip Code)

Registrant’s telephone number, including area code: 316.612.6000

Former name or former address, if changed since last report: Not Applicable

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

☒ Emerging growth company

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

 

 

 


Item 8.01 Other Events.

As previously reported, on November 10, 2017, Equity Bancshares, Inc. (the “Company”) completed its mergers with (i) Eastman National Bancshares, Inc., an Oklahoma corporation (“Eastman”), and (ii) Cache Holdings, Inc., an Oklahoma corporation (“Cache”), respectively.

On December 18, 2017, the Company filed a Current Report on Form 8-K reporting (i) its entry into an Agreement and Plan of Reorganization (the “KBC Agreement”), dated as of December 16, 2017, by and among the Company, Oz Merger Sub, Inc., a Kansas corporation, and Kansas Bank Corporation, a Kansas corporation (“KBC”), and (ii) its entry into an Agreement and Plan of Reorganization (the “Adams Agreement”), dated as of December 16, 2017, by and among the Company, Abe Merger Sub, Inc., a Missouri corporation, and Adams Dairy Bancshares, Inc., a Missouri corporation (“Adams”).

The Company intends to file (i) a Registration Statement on Form S-4 in connection with the KBC Agreement, and (ii) a Registration Statement on Form S-4 in connection with the Adams Agreement (collectively, the “Registration Statements”).

In connection with such Registration Statements to be filed by the Company, this Current Report on Form 8-K (this “Current Report”) is being filed by the Company to provide (i) audited historical financial statements of each of Cache and Eastman as of December 31, 2016 and for each of the two years in the period ended December 31, 2016, which are filed as Exhibits 99.1 and 99.3, respectively; and (ii) unaudited historical financial statements of each of Cache and Eastman as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016, which are filed as Exhibits 99.2 and 99.4, respectively.

The Company is also filing updated unaudited pro forma condensed consolidated combined financial statements for each of the Cache and Eastman transactions. The unaudited pro forma condensed consolidated combined financial statements and explanatory notes as of and for the nine months ended September 30, 2017 and for the year ended December 31, 2016 are attached to this Current Report as Exhibit 99.5.

 

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit

Number

  

Description

23.1    Consent of Sewell & Taylor LLP (with respect to Cache Holdings, Inc.).
23.2    Consent of Erwin & Company (with respect to Eastman National Bancshares, Inc.).
99.1    Audited consolidated financial statements of Cache Holdings, Inc. as of December 31, 2016 and 2015, and for each of the two years in the period ended December  31, 2016 as well as the accompanying notes thereto and the related Report of Independent Registered Public Accounting Firm.
99.2    Unaudited consolidated financial statements of Cache Holdings, Inc. as of and for the nine months ended September 30, 2017 and 2016 and as of year ended December  31, 2016 as well as the accompanying notes thereto.
99.3    Audited consolidated financial statements of Eastman National Bancshares, Inc. as of December 31, 2016 and 2015, and for each of the two years in the period ended December  31, 2016 as well as the accompanying notes thereto and the related Report of Independent Registered Public Accounting Firm.
99.4    Unaudited consolidated financial statements of Eastman National Bancshares, Inc. as of and for the nine months ended September 30, 2017 and 2016 and as of year ended December  31, 2016 as well as the accompanying notes thereto.
99.5    Unaudited pro forma condensed consolidated combined balance sheet as of September  30, 2017; unaudited pro forma condensed consolidated combined statement of income for the nine months ended September 30, 2017; unaudited pro forma condensed consolidated combined statement of income for the year ended December  31, 2016 and notes to unaudited pro forma condensed consolidated combined financial information.

 

2


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Equity Bancshares, Inc.
Date: February 7, 2018    

By: /s/ Brad S. Elliott

    Brad S. Elliott
    Chairman and Chief Executive Officer

 

3

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM

We consent to the use in this Form 8-K of our report dated August 10, 2017 on the consolidated financial statements of Cache Holdings, Inc. for the years ended December 31, 2016 and 2015.

 

/s/ SEWELL & TAYLOR LLP

SEWELL & TAYLOR LLP

Tulsa, Oklahoma

February 7, 2018

EX-23.2

Exhibit 23.2

 

LOGO

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Form 8-K of our report dated August 14, 2017 on the consolidated financial statements of Eastman National Bancshares, Inc. for the years ended December 31, 2016 and 2015.

 

/s/ Erwin & Company

Erwin & Company
Little Rock, Arkansas
February 7, 2018

6311 Ranch Drive • Little Rock, Arkansas 72223 • 501.868.7486 • fax 501.868.7750 • www.erwinco.com

EX-99.1

Exhibit 99.1

INDEX TO FINANCIAL STATEMENTS OF CACHE

 

Audited Consolidated Financial Statements of Cache Holdings, Inc.:

  

Report of Independent Public Accounting Firm

     F-2  

Consolidated Balance Sheets as of December 31, 2016 and 2015

     F-3  

Consolidated Statements of Income for the Years Ended December 31, 2016 and 2015

     F-4  

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015

     F-5  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015

     F-6  

Notes to Consolidated Financial Statements

     F-7  

 

F-1


INDEPENDENT AUDITOR’S REPORT

The Board of Directors and Stockholders

Cache Holdings, Inc.:

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Cache Holdings, Inc. and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the 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 financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s 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 audit 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.

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 Cache Holdings, Inc. and its 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.

/s/ SEWELL & TAYLOR LLP

August 10, 2017

 

F-2


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2016 and 2015

 

 

     2016      2015  
ASSETS      

Cash and Due from Banks

   $ 3,270,505      $ 3,695,488  

Federal Funds Sold

     21,150,000        17,086,000  
  

 

 

    

 

 

 

Cash and Cash Equivalents

     24,420,505        20,781,488  
  

 

 

    

 

 

 

Loans

     268,541,608        190,053,089  

Less allowance for loan losses

     3,826,224        2,828,046  
  

 

 

    

 

 

 

Loans, net

     264,715,384        187,225,043  

Premises and equipment, net

     4,101,038        4,144,720  

Accrued interest receivable

     755,957        478,017  

Investments in life insurance contracts

     3,793,101        3,678,538  

Federal Reserve Bank and Federal Home Loan Bank stock

     1,284,100        1,487,000  

Goodwill

     2,867,191        2,867,191  

Other assets

     326,732        282,358  
  

 

 

    

 

 

 

Total Assets

   $ 302,264,008      $ 220,944,355  
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Liabilities:

     

Deposits:

     

Non-interest bearing demand

   $ 18,427,390      $ 14,911,413  

Interest bearing deposits

     247,062,443        171,340,300  
  

 

 

    

 

 

 

Total Deposits

     265,489,833        186,251,713  
  

 

 

    

 

 

 

Accrued interest payable

     134,199        103,875  

Other liabilities

     1,678,144        1,503,585  

Other borrowings

     2,300,000        5,114,900  
  

 

 

    

 

 

 

Total Liabilities

     269,602,176        192,974,073  
  

 

 

    

 

 

 

Stockholders’ equity:

     

Common stock, $1.00 par value. Authorized 30,000 shares; issued 20,935 shares

     20,935        20,935  

Additional paid-in capital

     23,348,095        23,280,446  

Retained earnings

     9,292,802        4,668,901  
  

 

 

    

 

 

 

Total stockholders’ equity

     32,661,832        27,970,282  
  

 

 

    

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 302,264,008      $ 220,944,355  
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

F-3


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 2016 and 2015

 

 

     2016      2015  

Interest Income:

     

Loans

   $ 12,338,474      $ 9,010,487  

Federal Funds Sold

     68,402        14,844  

Other Interest and Dividend Income

     74,064        76,102  
  

 

 

    

 

 

 

Total interest income

     12,480,940        9,101,433  

Interest Expense:

     

Deposits

     1,587,119        925,285  

Other borrowed funds

     70,132        116,455  
  

 

 

    

 

 

 

Total interest expense

     1,657,251        1,041,740  
  

 

 

    

 

 

 

Net interest income

     10,823,689        8,059,693  

Provision for loan losses

     1,035,000        850,000  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,788,689        7,209,693  

Other Non-Interest Income:

     

Service charges on deposit accounts

     97,548        63,957  

Loans held for sale-transaction fees

     155,175        134,700  

Bank owned life insurance

     114,563        120,839  

Gain on sale of loans held for sale

     251,407        72,198  

Other non-interest income

     49,540        44,523  
  

 

 

    

 

 

 

Total other non-interest income

     668,233        436,217  
  

 

 

    

 

 

 

Other non-interest expenses:

     

Salaries and employee benefits

     2,829,258        2,536,798  

Occupancy costs

     443,794        426,893  

Professional fees

     156,726        230,660  

Data processing

     213,576        206,371  

Marketing

     245,156        173,202  

Deposit insurance premiums

     124,011        90,030  

Other expenses

     547,443        436,587  
  

 

 

    

 

 

 

Total other non-interest expense

     4,559,964        4,100,541  
  

 

 

    

 

 

 

Net Income

   $ 5,896,958      $ 3,545,369  
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

F-4


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Years ended December 31, 2016 and 2015

 

 

     Common
Stock
     Additional
Paid-In
Capital
     Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance, December 31, 2014

   $ 16,550        16,650,032        1,834,271       (246,400     18,254,453  

Net income – 2015

     —          —          3,545,369       —         3,545,369  

Unearned compensation – Stock options

     —          27,699        —         —         27,699  

Dividends paid

     —          —          (710,739     —         (710,739

Sale of 4,385 shares of common stock

     4,385        6,573,115        —         —         6,577,500  

Sale of 224 shares of treasury stock

     —          29,600        —         246,400       276,000  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

     20,935        23,280,446        4,668,901       —         27,970,282  

Net income—2016

     —          —          5,896,958       —         5,896,958  

Unearned compensation – Stock options

     —          67,649        —         —         67,649  

Dividends paid

     —          —          (1,273,057     —         (1,273,057
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

   $ 20,935        23,348,095        9,292,802       —         32,661,832  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-5


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2016 and 2015

 

     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 5,896,958     $ 3,545,369  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     1,035,000       850,000  

Depreciation and amortization

     168,440       166,088  

Federal Home Loan Bank stock dividends

     (23,700     (43,000

Stock based compensation expense

     67,649       27,699  

Earnings on cash value of life insurance

     (114,563     (120,839

(Increase) decrease in accrued interest receivable

     (277,940     (138,846

(Increase) decrease in other assets

     (44,324     (59,434

Increase (decrease) in accrued interest payable

     30,324       33,058  

Increase (decrease) in other liabilities

     174,559       513,227  
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,912,403       4,773,322  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net redemptions (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock

     226,600       (184,300

Net decrease (increase) in loans

     (78,526,641     (53,678,745

Additions to premises and equipment

     (123,508     (59,322
  

 

 

   

 

 

 

Net cash provided (used) in investing activities

     (78,423,549     (53,922,367
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     79,238,120       59,278,179  

Net increase (decrease) in other borrowings

     (2,814,900     814,900  

Proceeds from issuance of stock

     —         6,577,500  

Sale of treasury stock

     —         276,000  

Dividends paid

     (1,273,057     (710,739
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     75,150,163       66,235,840  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,639,017       17,086,795  

Cash and cash equivalents, beginning of year

     20,781,488       3,694,693  
  

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 24,420,505     $ 20,781,488  
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Interest Paid

   $ 1,626,927     $ 962,107  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-6


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a description of the significant accounting and reporting policies which the Company follows in preparing and presenting its financial statements. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The accompanying consolidated financial statements present the accounts of Cache Holdings, Inc. (the Company) and its wholly owned subsidiary, Patriot Bank (the Bank). All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

Nature of Operations

Cache Holdings, Inc. is a bank holding company whose operations consist principally of owning Patriot Bank.

Patriot Bank operates under a state bank charter and provides full banking services. The Bank is subject to regulation of the Federal Reserve and the Federal Deposit Insurance Corporation. The area served by Patriot Bank is primarily Oklahoma and surrounding states.

Organization

The Company purchased, as of October 16, 2009, 100% of the outstanding stock of FirstBank Center, Broken Arrow, Oklahoma, and changed its name to Patriot Bank.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold.

Loans Held for Sale

The Bank is funding loans originated by a Mortgage Company until the loans are securitized and sold. The Bank earns interest on the loans, plus a transaction fee, when the loans are sold. The carrying value of the loans is considered to be fair market value.

Loans

Loans are carried at the principal amount outstanding. Interest income on loans is credited to operations based on the principal amount outstanding. Loan origination fees and related costs, if material, are deferred and amortized as a yield adjustment over the life of the related loans.

 

F-7


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans (continued)

Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful. In the normal course of business, when a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against the appropriate income and balance sheet accounts. For interest accrued in the current year, the entry is made directly against the interest income account. For interest accrued in prior accounting periods, the interest is charged against the Allowance for Loan Losses account if provisions for possible interest loss were previously made. If accrued interest provisions had not been provided, the charge will be expensed against current earnings as other non-interest expense.

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.

This allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are 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. General component cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral- dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

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 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

 

F-8


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losess (continued)

for commercial and real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.

Bank-Owned Life Insurance

The Bank purchased single-premium life insurance on certain officers of the Bank. Appreciation in value of the insurance policies is classified as noninterest income.

Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)

Federal Reserve Bank and Federal Home Loan Bank stock are required investments for institutions that are members of the FRB and the FHLB. Stocks are carried at cost. The stocks are considered restricted securities and are periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income.

Income Taxes

The Company and its banking subsidiary are small business corporations (S Corporations) as defined in Section 1361(a) of the Internal Revenue Code. As an S Corporation, the Company and the Bank are generally exempt from statutory income taxes. The results of operations of the Company are included in the income tax returns of the individual stockholders. In accordance with certain provisions of the Internal Revenue Code, the Company files a consolidated income tax return with its banking subsidiary.

Consolidated income tax returns for the years 2014, 2015 and 2016 are statutorily open for examination by the Internal Revenue Service and the Oklahoma Tax Commission.

Treasury Stock

Treasury stock transactions are recorded at cost on a specific identification basis.

Off-Balance-Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

(2) RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve at December 31, 2016 and 2015, was approximately $1,455,000 and $1,108,000, respectively.

 

F-9


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consist of the following at December 31, 2016 and 2015:

 

in Thousands

   2016      2015  

Real Estate: Construction & Land Development

   $ 36,222      $ 41,006  
  

 

 

    

 

 

 

Real Estate – Mortgage:

     

Farmland

     424        413  

Multifamily

     8,360        10,227  

Commercial Properties

     95,822        65,940  

Residential Properties

     28,062        21,290  

Loans Held For Sale

     23,715        5,195  
  

 

 

    

 

 

 

Total Real Estate – Mortgage

     156,383        103,065  
  

 

 

    

 

 

 

Commercial and Industrial

     75,593        45,797  

Consumer

     343        185  
  

 

 

    

 

 

 

Total Loans

     268,541        190,053  

LESS: Allowance for Loan Losses

     (3,826)        (2,828)  
  

 

 

    

 

 

 

Net Loans

   $ 264,715      $ 187,225  
  

 

 

    

 

 

 

Total Loans as listed above

   $ 268,541      $ 190,053  

Less Loans Held for Sale

     23,715        5,195  
  

 

 

    

 

 

 

Total Loans net of Loans Held for Sale

   $ 244,826      $ 184,858  
  

 

 

    

 

 

 

At December 31, 2016 and 2015, the Bank has $127.53 million and $84.61 million of loans pledged as collateral for certain borrowings.

As of December 31, 2016, the real estate portfolio constituted 72% of the total loan portfolio. This can be broken down further into the following categories: 13% construction and land development, 39% commercial real estate, and 19% residential real estate loans, as a percent of total loans. The commercial real estate can be further broken down to 17% in owner occupied properties and 24% in non-owner occupied properties, as a percent of total loans.

Commercial real estate loans are secured by improved real property which is generating income in the normal course of business. Debt service coverage minimums, assuming stabilized occupancy, are typically required to support a permanent loan. The debt service coverage minimum is ordinarily at 1.20 to 1.00. These loans are generally underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is less. The preferred term is between 3 to 5 years, with maximum amortization of 25 years.

Residential real estate loans are secured by improved real property of the borrower and are usually underwritten with a term of 1 to 5 years, but may be underwritten with terms up to 25 years.

The Company also makes commercial and industrial loans for a variety of purposes, which include working capital, equipment, and accounts receivable financing. This category represents approximately 28% of the loan portfolio at December 31, 2016. Loans in this category generally carry a variable interest rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited.

 

F-10


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following tables show the allowance for loan losses and recorded investment in loans for the years ended December 31, 2016 and 2015:

 

in Thousands

  Construction
and Land
Development
    Multifamily     Farmland     Commercial
Real Estate
    Residential
Real Estate
    Commercial
and
Industrial
    Consumer     Total  

2016

               

Allowance for Loan Losses:

               

Beginning Balance

  $ 860     $ 164     $ 3     $ 840     $ 249     $ 710     $ 2     $ 2,828  

Charge-Offs

    —         —         —         —         —         (50     —         (50

Recoveries

    —         —         —         13       —         —         —         13  

Provisions

    157       36       2       398       120       321       1       1,035  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 1,017     $ 200     $ 5     $ 1,251     $ 369     $ 981     $ 3     $ 3,826  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

  $ 1,017     $ 200     $ 5     $ 1,251     $ 369     $ 981     $ 3     $ 3,826  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending Balance

  $ 36,222     $ 8,360     $ 424     $ 95,822     $ 28,062     $ 75,593     $ 343     $ 244,826  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

  $ 36,222     $ 8,360     $ 424     $ 95,822     $ 28,062     $ 75,593     $ 343     $ 244,826  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

in Thousands

  Construction
and Land
Development
    Multifamily     Farmland     Commercial
Real Estate
    Residential
Real Estate
    Commercial
and
Industrial
    Consumer     Total  

2015

               

Allowance for Loan Losses:

               

Beginning Balance

  $ 668     $ 116     $ 1     $ 526     $ 150     $ 496     $ 6     $ 1,963  

Charge-Offs

    —         —         —         —         —         —         (5     (5

Recoveries

    —         —         —         15       —         5       —         20  

Provisions

    192       48       2       299       99       209       1       850  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 860     $ 164     $ 3     $ 840     $ 249     $ 710     $ 2     $ 2,828  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

  $ 860     $ 164     $ 3     $ 840     $ 249     $ 710     $ 2     $ 2,828  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending Balance

  $ 41,006     $ 10,227     $ 413     $ 65,940     $ 21,290     $ 45,797     $ 185     $ 184,858  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Individually Evaluated for Impairment

  $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: Collectively Evaluated for Impairment

  $ 41,006     $ 10,227     $ 413     $ 65,940     $ 21,290     $ 45,797     $ 185     $ 184,858  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-11


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Credit quality indicators as of December 31, 2016 and 2015 are as follows:

Internally assigned grade:

Pass – loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.

Watch – Loans classified as watch possess potential weaknesses that require management attention, but do not yet warrant adverse classification. While the status of a loan put on this list may not technically trigger their classification as Special Mention or Substandard, it is considered a proactive way to identify potential issues and address them before the situation deteriorates further and does result in a loss for the Bank.

Special mention – loans in this category are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard – loans in this category show signs of continuing negative financial trends and unprofitability at various times, and, therefore, are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful – loans in this category are illiquid and highly leveraged, have negative net worth, cash flow, and continuing operating losses. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as loss is deferred until its more exact status may be determined.

Loss – loans in this category are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This classification does not mean that the loan has no recovery value, but that it is not practical to defer writing it off, even though partial recovery may be affected in the future. Such credits should be recommended for charge-off.

The information for each of the credit quality indicators is updated on a quarterly basis in conjunction with the determination of the adequacy of the allowance for loan losses.

Credit risk profile by internally assigned grade:

 

in Thousands

   Construction
and Land
Development
     Multifamily      Farmland      Commercial
Real Estate
     Residential
Real Estate
     Commercial
and Industrial
     Consumer      Total  

2016

                       

Pass

   $ 34,291      $ 8,360      $ 424      $ 90,733      $ 27,832      $ 68,033      $ 343      $ 230,016  

Watch/OAEM

     1,931        —          —          5,089        230        4,604        —          11,854  

Substandard

     —          —          —          —          —          2,956        —          2,956  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,222      $ 8,360      $ 424      $ 95,822      $ 28,062      $ 75,593      $ 343      $ 244,826  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2015

                       

Pass

   $ 41,006      $ 10,227      $ 413      $ 61,593      $ 21,053      $ 40,700      $ 185      $ 175,177  

Watch/OAEM

     —          —          —          4,180        237        4,940        —          9,357  

Substandard

     —          —          —          167        —          157        —          324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,006      $ 10,227      $ 413      $ 65,940      $ 21,290      $ 45,797      $ 185      $ 184,858  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-12


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Information on impaired loans for the years ended December 31, 2016 and 2015 are as follows:

 

in Thousands

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

2016

              

With No Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     1,213        1,213        —          1,238        158  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     716        716        —          794        269  

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,929      $ 1,929      $ —        $ 2,032      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     —          —          —          —          —    

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     1,213        1,213        —          1,238        158  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     716        716        —          794        269  

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand Total

   $ 1,929      $ 1,929      $ —        $ 2,032      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-13


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

in Thousands

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

2015

              

With No Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     267        267        —          455        27  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 267      $ 267      $ —        $ 455      $ 27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     —          —          —          —          —    

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     267        267        —          455        27  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand Total

   $ 267      $ 267      $ —        $ 455      $ 27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

F-14


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Age analysis tables of past due loans as of December 31, 2016 and 2015 are as follows:

 

in Thousands

   30-59
Days
Past Due
     60-89
Days
Past Due
     ³ 90 Days
Past Due
     Total
Past Due
     Current      ³ 90 & Still
Accruing
 

2016

                 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ 36,222      $ —    

Multifamily

     —          —          —          —          8,360        —    

Farmland

     —          —          —          —          424        —    

Commercial Properties

     —          1,452        —          1,452        94,370        —    

Residential Properties

     —          —          —          —          28,062        —    

Commercial and Industrial

     —          621        —          621        74,972        —    

Consumer

     —          —          —          —          343        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 2,073      $ —        $ 2,073      $ 242,753      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2015

                 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ 41,006      $ —    

Multifamily

     —          —          —          —          10,227        —    

Farmland

     —          —          —          —          413        —    

Commercial Properties

     —          —          —          —          65,940        —    

Residential Properties

     —          —          —          —          21,290        —    

Commercial and Industrial

     142        —          —          142        45,655        —    

Consumer

     —          —          —          —          185        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 142      $ —        $ —        $ 142      $ 184,716      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Information on performing and nonaccrual impaired loans as of December 31, 2016 and 2015 is as follows:

 

in Thousands

   12/31/2016      12/31/2015  

Impaired Performing Loans:

     

Construction & Land Development

   $ —        $ —    

Multifamily

     —          —    

Farmland

     —          —    

Commercial Properties

     —          —    

Residential Properties

     —          —    

Commercial and Industrial

     —          —    

Consumer

     —          —    
  

 

 

    

 

 

 

Total Impaired Performing Loans

   $ —        $ —    
  

 

 

    

 

 

 

 

F-15


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

 

in Thousands

   12/31/2016      12/31/2015  

Impaired Nonperforming Loans:

     

Nonaccrual Loans:

     

Construction & Land Development

   $ —        $ —    

Multifamily

     —          —    

Farmland

     —          —    

Commercial Properties

     1,213        267  

Residential Properties

     —          —    

Commercial and Industrial

     716        —    

Consumer

     —          —    
  

 

 

    

 

 

 

Total Impaired Nonperforming Loans

   $ 1,929      $ 267  
  

 

 

    

 

 

 

(4) PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

 

     2016      2015  

Land

   $ 900,000      $ 900,000  

Building

     2,992,441        2,992,441  

Furniture, fixtures and equipment

     1,040,747        917,239  
  

 

 

    

 

 

 
     4,933,188        4,809,680  

Less accumulated depreciation

     832,150        664,960  
  

 

 

    

 

 

 
   $ 4,101,038      $ 4,144,720  
  

 

 

    

 

 

 

(5) INVESTMENT IN LIFE INSURANCE CONTRACTS

The Company is the owner and the beneficiary of life insurance policies on certain directors and officers of the Bank, with aggregate death benefits of approximately $10,900,000 and $11,000,000 as of December 31, 2016 and 2015, respectively. The cash surrender value on the policies amounted to $3,793,101 and $3,678,538 as of December 31, 2016 and 2015, respectively.

(6) SAVINGS PLAN

The Bank has a savings plan which incorporates the provisions of Section 401(k) of the Internal Revenue Code. All employees, after meeting age and service requirements, are eligible to participate in the plan and receive matching employer contributions based upon years of service and the amount of contributions elected by the employee. Contributions by the Bank were $62,799 and $47,534 during the years ended December 31, 2016 and 2015, respectively.

(7) DEPOSITS

A summary of deposits follows:

 

F-16


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

     2016      2015  

Demand

   $ 18,427,390      $ 14,911,413  

NOW Accounts

     68,509,729        41,724,640  

Money Market Accounts

     62,009,213        35,396,421  

Savings

     508,786        650,015  

Certificates of Deposit, $250,000 and over

     16,760,406        16,009,664  

Other Certificates of Deposit

     99,274,309        77,559,560  
  

 

 

    

 

 

 

Total deposits

   $ 265,489,833      $ 186,251,713  
  

 

 

    

 

 

 

Certificates of deposit and other time deposits issued in denominations that meet or exceed the FDIC insurance limit of $250 thousand or more totaled $16,760,406 and $16,009,664 at December 31, 2016 and 2015, respectively, and are included in interest-bearing deposits in the consolidated balance sheet.

At December 31, 2016, the scheduled maturities of certificates of deposit are as follows:

 

2017

   $ 106,907,736  

2018 and 2019

     8,433,692  

2020 and 2021

     693,287  

2022 and thereafter

     0  
  

 

 

 

Totals

   $ 116,034,715  
  

 

 

 

(8) OTHER BORROWINGS

Other borrowings consist of:

 

     2016      2015  

Federal Home Loan Bank of Topeka

   $ 1,300,000      $ 5,114,900  

The Bankers Bank

     1,000,000        —    
  

 

 

    

 

 

 

Total

   $ 2,300,000      $ 5,114,900  
  

 

 

    

 

 

 

Federal Home Loan Bank borrowings at December 31, 2016 mature as follows:

 

2018    $ 600,000  
2019      700,000  
  

 

 

 
   $ 1,300,000  
  

 

 

 

Federal Home Loan Bank borrowings are secured by certain loans.

The Bankers Bank note, with interest at prime floating, 4.25%, matures May 27, 2018 and is secured by Bank stock.

At December 31, 2016, the Bank had unused lines of credit aggregating approximately $97,000,000.

 

F-17


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(9) DIVIDENDS FROM BANK SUBSIDIARY

Dividends from Patriot Bank are the primary source of funds available to the Company for interest and principal payments on the note payable and for other cash requirements.

Banks are restricted under various statutes as to the amount of dividends that may be paid in any calendar year. Generally, banks can pay dividends equal to the prior two years undistributed net profits (as defined) plus an additional amount equal to the bank’s net profits during the applicable dividend period without prior approval by the Federal Reserve.

At December 31, 2016, the Bank could pay dividends of approximately $10,000,000 with approval of the bank regulators.

(10) STOCK OPTIONS

The Company has granted incentive stock options to certain officers of Patriot Bank. The options granted are to purchase Company common stock at not less than fair market value at date of grant. Options are generally exercisable annually in cumulative installments of 20% and fully vest upon a change of control.

The following summarizes stock option activity for 2016 and 2015:

 

     Shares      Exercise
Price Range
 

Outstanding as of December 31, 2014

     2,020      $ 1,000-$1,500  

Granted

     —          —    

Cancelled

     —          —    

Exercised

     —          —    
  

 

 

    

 

 

 

Outstanding as of December 31, 2015

     2,020      $ 1,000-$1,500  

Granted

     500      $ 1,500  

Cancelled

     —          —    

Exercised

     —          —    
  

 

 

    

 

 

 

Outstanding as of December 31, 2016

     2,520      $ 1,000-$1,500  
  

 

 

    

 

 

 

As of December 31, 2016 and 2015, 1,446 shares and 1,122 shares were exercisable at prices ranging from $1,000 to $1,500 per share.

Stock-based compensation expense recognized in the accompanying consolidated statements of income amounted to $67,649 and $27,699 for 2016 and 2015, respectively. At December 31, 2016, there was $222,341 of unrecognized compensation cost.

(11) RELATED PARTY TRANSACTIONS

In the ordinary course of business, officers, directors and employees of the Bank are customers of and engage in transactions with the Bank. These transactions are on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk or present other unfavorable features. Loans to such parties are made in accordance with terms and policies of the Bank and are specifically authorized by the Board of Directors. Aggregate loans, owed to the Bank by such persons, were approximately $6,588,000 and $1,949,000 at December 31, 2016 and 2015, respectively. Deposits from related parties held by the Bank at December 31, 2016 and 2015 amounted to approximately $5,600,000 and $3,000,000, respectively.

 

F-18


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(12) COMMITMENTS AND CONTINGENT LIABILITY

Loans – In the normal course of business, the Bank makes commitments under standby letters of credit that are not reflected in the accompanying financial statements. Commitments under these standby letters of credit aggregated approximately $727,000 and $1,300,000 at December 31, 2016 and 2015, respectively.

The Bank is committed to fund unused portions of lines of credit and construction loans to borrowers in compliance with the related loan agreements that are not reflected in the accompanying financial statements. At December 31, 2016 and 2015, the unused portions of lines of credit and construction loans aggregated approximately $34,800,000 and $42,000,000, respectively.

The Bank does not anticipate any material losses as a result of these commitments.

(13) LITIGATION

The Bank is subject to various claims and lawsuits which arise primarily in the ordinary course of business. There are no outstanding or unresolved claims or lawsuits.

(14) REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 of Common Equity Tier 1 Capital (“CETI”), Tier 1 Capital, Total Capital and leverage ratio of Tier 1 Capital. The requirements are:

 

    4.5% based upon CETI

 

    6.0% based upon Tier 1 Capital

 

    8.0% based on total regulatory capital

 

    Leverage ratio of Tier 1 Capital assets equal to 4%

As of December 31, 2016 and 2015, management believes the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

 

F-19


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(14) REGULATORY CAPITAL REQUIREMENTS (continued)

 

The Bank’s actual capital amounts and ratios are presented in the following table (in thousands):

 

     Actual     Minimum
Required For
Capital Adequacy
Under Basel III
Phase-In
    Minimum
Required
For Capital
Adequacy Under
Basel III Fully
Phased-In
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2016

               

Common Equity Tier I Ratio

   $ 30,568        10.61   $ 14,765        >5.125   $ 20,168        > 7.0

Tier I Capital to Risk Weighted Assets

   $ 30,568        10.61   $ 19,087        >6.625   $ 24,490        > 8.5

Total Risk Based Capital to Risk Weighted Assets

   $ 34,172        11.86   $ 24,850        >8.625   $ 30,252        >10.5

Tier I Capital to Average Assets

   $ 30,568        10.03   $ 12,192        >4.0   $ 12,182        > 4.0
     Actual     Minimum Capital
Requirements
    Minimum To Be Well
Capitalized Under
Base III Requirements
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2015

               

Common Equity Tier I Ratio

   $ 24,857        11.08   $ 10,094        >4.5   $ 14,580        > 6.5

Tier I Capital to Risk Weighted Assets

   $ 24,857        11.08   $ 13,458        >6.0   $ 17,944        > 8.0

Total Risk Based Capital to Risk Weighted Assets

   $ 27,661        12.33   $ 17,944        >8.0   $ 22,430        >10.0

Tier I Capital to Average Assets

   $ 24,857        11.59   $ 8,579        >4.0   $ 10,724        > 5.0

(15) FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

These techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value accounting guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset, a change in valuation technique or the use of multiple valuation techniques may be appropriate.

In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

F-20


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

In accordance with this guidance, the Company groups its financial assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

 

    Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity 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 or 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 may include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the 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.

When available, the Company attempts to use quoted market prices to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices are not available, fair value is often determined using model-based techniques incorporating various assumptions, including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the extent to which the valuation inputs are based on market data obtained from independent sources.

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

 

     2016      2015  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Financial Assets:

           

Cash and cash equivalents

   $ 24,420,505      $ 24,420,505      $ 20,781,488      $ 20,781,488  

FRB and FHLB stock

     1,284,100        1,284,100        1,487,000        1,487,000  

Loans Held for Sale

     23,715,312        23,715,312        5,195,019        5,195,019  

Loans, net

     253,830,146        241,000,072        191,230,786        182,030,024  

Interest receivable

     755,957        755,957        478,017        478,017  

Financial Liabilities:

           

Deposits

     255,422,657        265,489,833        182,589,051        186,251,713  

Other Borrowings

     2,314,694        2,300,000        6,281,551        5,114,900  

Interest Payable

     134,199        134,199        103,875        103,875  

Off-Balance Sheet Commitments:

           

Standby Letters of Credit

     726,760        726,760        1,327,045        1,327,045  

 

F-21


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Years ended December 31, 2016 and 2015

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents and Interest Bearing Deposits in Banks – The carrying value approximates their fair values.

Loans Held for Sale – The carrying value approximates its fair value.

Loans – The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality.

Interest Receivable – The carrying value approximates its fair value.

Deposits – The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings – The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

Interest Payable – The carrying value approximates the fair value.

Off-Balance Sheet Instruments – Fair values for the Company’s off-statement-of-financial-condition instruments (unused lines of credit and letters of credit), which are based upon fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and counterparties’ credit standing, are not significant. Many of the Company’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements.

(16) CONCENTRATIONS

The Company held approximately $156,384,000 and $103,065,000 at December 31, 2016 and 2015, respectively, in loans collateralized by real estate.

(17) SUBSEQUENT EVENTS

Cache Holdings, Inc. and its subsidiary, Patriot Bank, have agreed to be acquired by Equity Bancshares, Inc. The acquisition, which is subject to regulatory approval, is expected to be completed in the fourth quarter of 2017.

Subsequent events have been evaluated through August 10, 2017, which is the date the financial statements were available to be issued.

 

F -22

EX-99.2

Exhibit 99.2

CACHE HOLDINGS, INC. AND SUBSIDIARY

September 30, 2017 and 2016 and Year ended December 31, 2016

Contents

 

Independent Accountant’s Compilation Report

     1  

Financial Statements:

  

Balance Sheets

     2  

Statements of Income

     3  

Statements of Stockholders’ Equity

     4  

Statements of Cash Flows

     5  

Notes to Financial Statements

     6  


INDEPENDENT ACCOUNTANT’S COMPILATION REPORT

The Board of Directors and Stockholders

Cache Holdings, Inc.:

Management is responsible for the accompanying consolidated financial statements of Cache Holdings, Inc. and Subsidiary, which comprise the consolidated balance sheets as of September 30, 2017 and December 31, 2016, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the nine months ended September 30, 2017 and 2016 and the related notes to the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the consolidated financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these consolidated financial statements.

 

/S/ SEWELL & TAYLOR LLP

SEWELL & TAYLOR LLP

February 2, 2018

 

1


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2017 and December 31, 2016

 

     September 30,
2017
     December 31,
2016
 

ASSETS

     

Cash and cash equivalents

   $ 6,066,766      $ 3,270,505  

Federal funds sold

     5,097,000        21,150,000  
  

 

 

    

 

 

 

Cash and Cash Equivalents

     11,163,766        24,420,505  
  

 

 

    

 

 

 

Loans

     309,299,789        268,541,608  

Less allowance for loan losses

     4,055,224        3,826,224  
  

 

 

    

 

 

 

Loans, net

     305,244,565        264,715,384  

Premises and equipment, net

     4,008,615        4,101,038  

Accrued interest receivable

     804,430        755,957  

Investments in life insurance contracts

     3,874,151        3,793,101  

Federal Reserve Bank and Federal Home Loan Bank stock

     1,610,000        1,284,100  

Goodwill

     2,867,191        2,867,191  

Other assets

     342,387        326,732  
  

 

 

    

 

 

 

Total Assets

   $ 329,915,105      $ 302,264,008  
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Liabilities:

     

Deposits:

     

Non-interest bearing demand

   $ 21,815,874      $ 18,427,390  

Interest bearing deposits

     255,713,386        247,062,443  
  

 

 

    

 

 

 

Total Deposits

     277,529,260        265,489,833  
  

 

 

    

 

 

 

Accrued interest payable

     165,090        134,199  

Other liabilities

     1,700,167        1,678,144  

Other borrowings

     14,259,100        2,300,000  
  

 

 

    

 

 

 

Total Liabilities

     293,653,617        269,602,176  
  

 

 

    

 

 

 

Stockholders’ equity:

     

Common stock, $1.00 par value. Authorized 30,000 shares; issued 20,935 shares

     20,935        20,935  

Additional paid-in capital

     23,410,216        23,348,095  

Retained earnings

     12,830,337        9,292,802  
  

 

 

    

 

 

 

Total stockholders’ equity

     36,261,488        32,661,832  
  

 

 

    

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 329,915,105      $ 302,264,008  
  

 

 

    

 

 

 

See Accompanying Notes

 

2


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Income

Nine Months ended September 30, 2017 and 2016

 

     2017      2016  

Interest Income:

     

Loans

   $ 11,354,014      $ 8,813,241  

Federal Funds Sold

     98,739        51,055  

Other Interest and Dividend Income

     76,402        40,265  
  

 

 

    

 

 

 

Total interest income

     11,529,155        8,904,561  

Interest Expense:

     

Deposits

     1,730,374        1,136,895  

Other borrowed funds

     165,767        36,506  
  

 

 

    

 

 

 

Total interest expense

     1,896,141        1,173,401  
  

 

 

    

 

 

 

Net interest income

     9,633,014        7,731,160  

Provision for loan losses

     440,000        780,000  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,193,014        6,951,160  

Other Non-Interest Income:

     

Service charges on deposit accounts

     65,091        77,385  

Loans held for sale transaction fees

     132,675        105,825  

Bank owned life insurance

     81,050        86,688  

Gain on sale of loans

     —          251,407  

Other non-interest income

     49,487        34,680  
  

 

 

    

 

 

 

Total other non-interest income

     328,303        555,985  
  

 

 

    

 

 

 

Other non-interest expenses:

     

Salaries and employee benefits

     2,344,348        2,124,532  

Occupancy costs

     323,211        324,387  

Professional fees

     131,647        99,956  

Data processing

     146,362        163,617  

Marketing

     124,760        142,497  

Deposit insurance premiums

     379,619        84,496  

Other expenses

     439,343        414,032  
  

 

 

    

 

 

 

Total other non-interest expense

     3,889,290        3,353,517  
  

 

 

    

 

 

 

Net Income

   $ 5,632,027      $ 4,153,628  
  

 

 

    

 

 

 

See Accompanying Notes

 

3


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months ended September 30, 2017 and 2016

 

     Common
Stock
     Additional
Paid-In Capital
     Retained
Earnings
    Total
Stockholders’
Equity
 

Balance, December 31, 2015

   $ 20,935      $ 23,280,446      $ 4,668,901     $ 27,970,282  

Net income – Nine months ended September 30, 2016

     —          —          4,153,628       4,153,628  

Unearned compensation - Stock options

     —          49,702        —         49,702  

Dividends paid

     —          —          (1,273,057     (1,273,057
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, September 30, 2016

   $ 20,935      $ 23,330,148      $ 7,549,472     $ 30,900,555  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2016

   $ 20,935      $ 23,348,095      $ 9,292,802     $ 32,661,832  

Net income - Nine months ended September 30, 2017

     —          —          5,632,027       5,632,027  

Unearned compensation - Stock options

     —          62,121        —         62,121  

Dividends paid

     —          —          (2,094,492     (2,094,492
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, September 30, 2017

   $ 20,935      $ 23,410,216      $ 12,830,337     $ 36,261,488  
  

 

 

    

 

 

    

 

 

   

 

 

 

See Accompanying Notes

 

4


CACHE HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine Months ended September 30, 2017 and 2016

 

     2017     2016  

Cash flows from operating activities:

    

Net income

   $ 5,632,027     $ 4,153,628  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     440,000       780,000  

Depreciation and amortization

     124,601       121,352  

Federal Home Loan Bank stock dividends

     (34,800     (12,300

Stock based compensation expense

     62,121       49,702  

Earnings on cash value of life insurance

     (81,050     (86,688

(Increase) decrease in accrued interest receivable

     (48,473     (116,512

(Increase) decrease in other assets

     (16,593     (70,203

Increase (decrease) in accrued interest payable

     30,891       11,807  

Increase (decrease) in other liabilities

     22,023       135,891  
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,130,747       4,966,677  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net redemptions (purchases) of Federal Reserve Bank and Federal Home Loan Bank stock

     (291,100     (504,000

Net (increase) decrease in loans

     (40,969,181     (81,465,298

Additions to premises and equipment

     (31,240     (58,589
  

 

 

   

 

 

 

Net cash provided (used) in investing activities

     (41,291,521     (82,027,887
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     12,039,427       48,097,719  

Net increase (decrease) in other borrowings

     11,959,100       22,825,700  

Dividends paid

     (2,094,492     (1,273,057
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     21,904,035       69,650,362  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (13,256,739     (7,410,848

Cash and cash equivalents, beginning of period

     24,420,505       20,781,488  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 11,163,766     $ 13,370,640  
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Interest Paid

   $ 1,865,250     $ 1,161,375  
  

 

 

   

 

 

 

See Accompanying Notes

 

5


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a description of the significant accounting and reporting policies which the Company follows in preparing and presenting its financial statements. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The accompanying consolidated financial statements present the accounts of Cache Holdings, Inc. (the Company) and its wholly owned subsidiary, Patriot Bank (the Bank). All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

Nature of Operations

Cache Holdings, Inc. is a bank holding company whose operations consist principally of owning Patriot Bank.

Patriot Bank operates under a state bank charter and provides full banking services. The Bank is subject to regulation of the Federal Reserve, the Federal Deposit Insurance Corporation and the Oklahoma State Banking Department. The area served by Patriot Bank is primarily Oklahoma and surrounding states.

Organization

The Company purchased, as of October 16, 2009, 100% of the outstanding stock of First BankCentre, Broken Arrow, Oklahoma, and changed its name to Patriot Bank.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold.

Loans Held for Sale

The Bank is funding loans originated by a Mortgage Company until the loans are securitized and sold. The Bank earns interest on the loans, plus a transaction fee, when the loans are sold. The carrying value of the loans is considered to be fair market value.

Loans

Loans are carried at the principal amount outstanding. Interest income on loans is credited to operations based on the principal amount outstanding. Loan origination fees and related costs, if material, are deferred and amortized as a yield adjustment over the life of the related loans.

 

6


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans (continued)

Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful. In the normal course of business, when a loan is placed on nonaccrual status, all previously accrued but uncollected interest is reversed against the appropriate income and balance sheet accounts. For interest accrued in the current year, the entry is made directly against the interest income account. For interest accrued in prior accounting periods, the interest is charged against the Allowance for Loan Losses account if provisions for possible interest loss were previously made. If accrued interest provisions had not been provided, the charge will be expensed against current earnings as other non-interest expense.

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.

This allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are 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. General component cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral- dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

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 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

 

7


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losses (continued)

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 real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets.

Bank-Owned Life Insurance

The Bank purchased single-premium life insurance on certain officers of the Bank. Appreciation in value of the insurance policies is classified as noninterest income.

Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)

Federal Reserve Bank and Federal Home Loan Bank stock are required investments for institutions that are members of the FRB and the FHLB. Stocks are carried at cost. The stocks are considered restricted securities and are periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income.

Income Taxes

The Company and its banking subsidiary are small business corporations (S Corporations) as defined in Section 1361(a) of the Internal Revenue Code. As an S Corporation, the Company and the Bank are generally exempt from statutory income taxes. The results of operations of the Company are included in the income tax returns of the individual stockholders. In accordance with certain provisions of the Internal Revenue Code, the Company files a consolidated income tax return with its banking subsidiary.

Consolidated income tax returns for the years 2014, 2015 and 2016 are statutorily open for examination by the Internal Revenue Service and the Oklahoma Tax Commission.

Treasury Stock

Treasury stock transactions are recorded at cost on a specific identification basis.

Off-Balance-Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

 

8


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(2) RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve at September 30, 2017 and December 31, 2016, was approximately $2,668,000 and $1,455,000, respectively.

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consist of the following at September 30, 2017 and December 31, 2016:

 

in Thousands

   September 30,
2017
     December 31,
2016
 

Real Estate: Construction & Land Development

   $ 39,153      $ 36,222  
  

 

 

    

 

 

 

Real Estate - Mortgage:

     

Farmland

     544        424  

Multifamily

     8,152        8,360  

Commercial Properties

     112,529        95,822  

Residential Properties

     37,030        28,062  

Loans Held For Sale

     27,126        23,715  
  

 

 

    

 

 

 

Total Real Estate - Mortgage

     185,381        156,383  
  

 

 

    

 

 

 

Commercial and Industrial

     84,438        75,593  

Consumer

     328        343  
  

 

 

    

 

 

 

Total Loans

     309,300        268,541  

LESS: Allowance for Loan Losses

     (4,055      (3,826
  

 

 

    

 

 

 

Net Loans

   $ 305,245      $ 264,715  
  

 

 

    

 

 

 

Total Loans as listed above

   $ 309,300      $ 268,541  

Less Loans Held for Sale

     27,126        23,715  
  

 

 

    

 

 

 

Total Loans net of Loans Held for Sale

   $ 282,174      $ 244,826  
  

 

 

    

 

 

 

At September 30, 2017 and December 31, 2016, the Bank had $125.50 million and $127.53 million of loans pledged as collateral for certain borrowings.

As of September 30, 2017, the real estate portfolio constituted 72.6% of the total loan portfolio. This can be broken down further into the following categories: 12.7% construction and land development, 36.4% commercial real estate, and 12.0% residential real estate loans, as a percent of total loans. The commercial real estate can be further broken down to 15.9% in owner occupied properties and 20.5% in non-owner occupied properties, as a percent of total loans.

As of December 31, 2016, the real estate portfolio constituted 72% of the total loan portfolio. This can be broken down further into the following categories: 13% construction and land development, 39% commercial real estate, and 19% residential real estate loans, as a percent of total loans. The commercial real estate can be further broken down to 17% in owner occupied properties and 24% in non-owner occupied properties, as a percent of total loans.

 

9


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The Company’s construction and land development loans are secured by real property where the loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner occupied commercial properties. Borrowers are generally required to put equity into the project at levels determined by the loan committee and usually are underwritten with a maximum term of 24 months.

Commercial real estate loans are secured by improved real property which is generating income in the normal course of business. Debt service coverage minimums, assuming stabilized occupancy, are typically required to support a permanent loan. The debt service coverage minimum is ordinarily at 1.20 to 1.00. These loans are generally underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is less. The preferred term is between 3 to 5 years, with maximum amortization of 25 years.

Residential real estate loans are secured by improved real property of the borrower and are usually underwritten with a term of 1 to 5 years, but may be underwritten with terms up to 25 years.

The Company also makes commercial and industrial loans for a variety of purposes, which include working capital, equipment, and accounts receivable financing. This category represents approximately 27.3% of the loan portfolio at September 30, 2017, as compared to 28.1% at December 31, 2016. Loans in this category generally carry a variable interest rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited.

The following tables show the allowance for loan losses for the nine months ended September 30, 2017 and 2016 and recorded investment in loans as of September 30, 2017 and December 31, 2016:

 

in Thousands

   Construction
and Land
Development
     Multifamily      Farmland      Commercial
Real Estate
    Residential
Real
Estate
     Commercial
and
Industrial
     Consumer      Total  

September 30, 2017

                      

Allowance for Loan Losses:

                      

Beginning Balance

   $ 1,017      $ 200      $ 5      $ 1,251     $ 369      $ 981      $ 3      $ 3,826  

Charge-Offs

     —          —          —          (215     —          —          —          (215

Recoveries

     —          —          —          —         4        —          —          4  

Provisions

     117        23        0        143       45        112        0        440  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 1,134      $ 223      $ 5      $ 1,179     $ 418      $ 1,093      $ 3      $ 4,055  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ —        $ —        $ —        $ —       $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 1,134      $ 223      $ 5      $ 1,179     $ 418      $ 1,093      $ 3      $ 4,055  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                      

Ending Balance

   $ 39,153      $ 8,152      $ 544      $ 112,529     $ 37,030      $ 84,438      $ 328      $ 282,174  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ —        $ —        $ —        $ —       $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 39,153      $ 8,152      $ 544      $ 112,529     $ 37,030      $ 84,438      $ 328      $ 282,174  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

10


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

in Thousands

   Construction
and Land
Development
     Multifamily      Farmland      Commercial
Real Estate
     Residential
Real Estate
     Commercial
and
Industrial
    Consumer      Total  

September 30, 2016

                      

Allowance for Loan Losses:

                      

Beginning Balance

   $ 860      $ 164      $ 3      $ 840      $ 249      $ 710     $ 2      $ 2,828  

Charge-Offs

     —          —          —          —          —          (50     —          (50

Recoveries

     —          —          —          —          —          —         —          —    

Provisions

     236        44        1        231        74        194       —          780  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,096      $ 208      $ 4      $ 1,071      $ 323      $ 854     $ 2      $ 3,558  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ —        $ —        $ —        $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 1,096      $ 208      $ 4      $ 1,071      $ 323      $ 854     $ 2      $ 3,558  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans:

                      

Ending Balance

   $ 36,095      $ 8,428      $ 427      $ 102,427      $ 27,674      $ 69,690     $ 360      $ 245,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ —        $ —        $ —        $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 36,095      $ 8,428      $ 427      $ 102,427      $ 27,674      $ 69,690     $ 360      $ 245,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2016

Loans:

                      

Ending Balance

   $ 36,222      $ 8,360      $ 424      $ 95,822      $ 28,062      $ 75,593     $ 343      $ 244,826  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Individually Evaluated for Impairment

   $ —        $ —        $ —        $ —        $ —        $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance: Collectively Evaluated for Impairment

   $ 36,222      $ 8,360      $ 424      $ 95,822      $ 28,062      $ 75,593     $ 343      $ 244,826  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Credit quality indicators as of September 30, 2017 and December 31, 2016 are as follows:

Internally assigned grade:

Pass – loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.

Watch – Loans classified as watch possess potential weaknesses that require management attention, but do not yet warrant adverse classification. While the status of a loan put on this list may not technically trigger their classification as Special Mention or Substandard, it is considered a proactive way to identify potential issues and address them before the situation deteriorates further and does result in a loss for the Bank.

Special mention – loans in this category are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

 

11


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Substandard – loans in this category show signs of continuing negative financial trends and unprofitability at various times, and, therefore, are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful – loans in this category are illiquid and highly leveraged, have negative net worth, cash flow, and continuing operating losses. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as loss is deferred until its more exact status may be determined.

Loss – loans in this category are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This classification does not mean that the loan has no recovery value, but that it is not practical to defer writing it off, even though partial recovery may be affected in the future. Such credits should be recommended for charge-off.

The information for each of the credit quality indicators is updated on a quarterly basis in conjunction with the determination of the adequacy of the allowance for loan losses.

Credit risk profile by internally assigned grade:

 

in Thousands

   Construction
and Land
Development
     Multifamily      Farmland      Commercial
Real Estate
     Residential
Real Estate
     Commercial
and
Industrial
     Consumer      Total  

September 30, 2017

                       

Pass

   $ 37,646      $ 8,152      $ 544      $ 107,475      $ 36,131      $ 78,524      $ 328      $ 268,800  

Watch

     1,507        —          —          4,163        899        4,132        —          10,701  

Substandard

     —          —          —          891        —          1,782        —          2,673  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,153      $ 8,152      $ 544      $ 112,529      $ 37,030      $ 84,438      $ 328      $ 282,174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                       

Pass

   $ 34,291      $ 8,360      $ 424      $ 90,733      $ 27,832      $ 68,033      $ 343      $ 230,016  

Watch

     1,931        —          —          5,089        230        4,604        —          11,854  

Substandard

     —          —          —          —          —          2,956        —          2,956  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,222      $ 8,360      $ 424      $ 95,822      $ 28,062      $ 75,593      $ 343      $ 244,826  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Information on impaired loans for the nine months ended September 30, 2017 and year ended December 31, 2016 are as follows:

 

in Thousands

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

September 30, 2017

With No Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     891        891        —          1,158        38  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 891      $ 891      $ —        $ 1,158      $ 38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     —          —          —          —          —    

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     891        891        —          1,158        38  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand Total

   $ 891      $ 891      $ —        $ 1,158      $ 38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

in Thousands

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

December 31, 2016

With No Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     1,213        1,213        —          1,238        158  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     716        716        —          794        269  

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,929      $ 1,929      $ —        $ 2,032      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With Related Allowance Recorded:

              

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     —          —          —          —          —    

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     —          —          —          —          —    

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ —    

Commercial Real Estate

     1,213        1,213        —          1,238        158  

Residential Real Estate

     —          —          —          —          —    

Commercial & Industrial

     716        716        —          794        269  

Consumer

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Grand Total

   $ 1,929      $ 1,929      $ —        $ 2,032      $ 427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Age analysis tables of past due loans as of September 30, 2017 and December 31, 2016 are as follows:

 

in Thousands

   30-59
Days
Past Due
     60-89
Days
Past Due
     ³ 90 Days
Past Due
     Total
Past Due
     Current      ³ 90
& Still
Accruing
 

September 30, 2017

                 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ 39,153      $ —    

Multifamily

     —          —          —          —          8,152        —    

Farmland

     —          —          —          —          544        —    

Commercial Properties

     —          —          891        891        111,638        —    

Residential Properties

     —          —          —          —          37,030        —    

Commercial and Industrial

     —          —          —          —          84,438        —    

Consumer

     7        —          —          7        321        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7      $ —        $ 891      $ 898      $ 281,276      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Construction & Land Development

   $ —        $ —        $ —        $ —        $ 36,222      $ —    

Multifamily

     —          —          —          —          8,360        —    

Farmland

     —          —          —          —          424        —    

Commercial Properties

     —          1,452        —          1,452        94,370        —    

Residential Properties

     —          —          —          —          28,062        —    

Commercial and Industrial

     —          621        —          621        74,972        —    

Consumer

     —          —          —          —          343        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 2,073      $ —        $ 2,073      $ 242,753      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(3) LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Information on performing and nonaccrual impaired loans as of September 30, 2017 and December 31, 2016 is as follows:

 

in Thousands

   September 30,
2017
     December 31,
2016
 

Impaired Performing Loans:

     

Construction & Land Development

   $ —        $ —    

Multifamily

     —          —    

Farmland

     —          —    

Commercial Properties

     —          —    

Residential Properties

     —          —    

Commercial and Industrial

     —          —    

Consumer

     —          —    
  

 

 

    

 

 

 

Total Impaired Performing Loans

   $ —        $ —    
  

 

 

    

 

 

 

Impaired Nonperforming Loans:

     

Nonaccrual Loans:

     

Construction & Land Development

   $ —        $ —    

Multifamily

     —          —    

Farmland

     —          —    

Commercial Properties

     891        1,213  

Residential Properties

     —          —    

Commercial and Industrial

     —          716  

Consumer

     —          —    
  

 

 

    

 

 

 

Total Impaired Nonperforming Loans

   $ 891      $ 1,929  
  

 

 

    

 

 

 

 

(4) PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

 

     September 30,
2017
     December 31,
2016
 

Land

   $ 900,000      $ 900,000  

Building

     2,992,441        2,992,441  

Furniture, fixtures and equipment

     1,071,986        1,040,747  
  

 

 

    

 

 

 
     4,964,427        4,933,188  

Less accumulated depreciation

     955,812        832,150  
  

 

 

    

 

 

 
   $ 4,008,615      $ 4,101,038  
  

 

 

    

 

 

 

 

16


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(5) INVESTMENT IN LIFE INSURANCE CONTRACTS

The Company is the owner and the beneficiary of life insurance policies on certain directors and officers of the Bank, with aggregate death benefits of approximately $10,910,000 and $10,988,000 as of September 30, 2017 and December 31, 2016, respectively. The cash surrender value on the policies amounted to $3,874,151 and $3,793,101 as of September 30, 2017 and December 31, 2016, respectively.

 

(6) SAVINGS PLAN

The Bank has a savings plan which incorporates the provisions of Section 401(k) of the Internal Revenue Code. All employees, after meeting age and service requirements, are eligible to participate in the plan and receive matching employer contributions based upon years of service and the amount of contributions elected by the employee. Contributions by the Bank were $60,495 and $48,554 during the nine months ended September 30, 2017 and 2016, respectively.

 

(7) DEPOSITS

A summary of deposits follows:

 

     September 30,
2017
     December 31,
2016
 

Demand

   $ 21,815,874      $ 18,427,390  

NOW Accounts

     69,099,475        68,509,729  

Money Market Accounts

     61,969,622        62,009,213  

Savings

     351,992        508,786  

Certificates of Deposit, $250,000 and over

     16,339,263        16,760,406  

Other Certificates of Deposit

     107,953,034        99,274,309  
  

 

 

    

 

 

 

Total deposits

   $ 277,529,260      $ 265,489,833  
  

 

 

    

 

 

 

Certificates of deposit and other time deposits issued in denominations that meet or exceed the FDIC insurance limit of $250 thousand or more totaled $16,339,263 and $16,760,406 at September 30, 2017 and December 31, 2016, respectively, and are included in interest-bearing deposits in the consolidated balance sheets.

At September 30, 2017, the scheduled maturities of certificates of deposit were as follows:

 

Due in 1 year      $114,700,569  

Due in years 2-3

     8,364,185  

Due in years 4-5

     1,227,543  
  

 

 

 

Total

   $ 124,292,297  
  

 

 

 

 

17


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(8) OTHER BORROWINGS

Other borrowings consist of:

 

     2017      2016  

Federal Home Loan Bank of Topeka-line of credit

   $ 11,959,100      $ —    

Federal Home Loan Bank of Topeka-term advance

     1,300,000        1,300,000  

The Bankers Bank

     1,000,000        1,000,000  
  

 

 

    

 

 

 

Total

   $ 14,259,100      $ 2,300,000  
  

 

 

    

 

 

 

Federal Home Loan Bank term advance at September 30, 2017 matures as follows:

 

October 26, 2018

   $ 600,000  

April 24, 2019

     700,000  
  

 

 

 
   $ 1,300,000  
  

 

 

 

Federal Home Loan Bank borrowings are secured by certain loans.

The Bankers Bank note, with interest at prime floating, 4.25%, matures May 27, 2018 and is secured by Bank stock.

At September 30, 2017, the Bank had unused lines of credit aggregating approximately $98,000,000.

 

(9) DIVIDENDS FROM BANK SUBSIDIARY

Dividends from Patriot Bank are the primary source of funds available to the Company for interest and principal payments on the note payable and for other cash requirements.

Banks are restricted under various statutes as to the amount of dividends that may be paid in any calendar year. Generally, banks can pay dividends equal to the prior two years undistributed net profits (as defined) plus an additional amount equal to the bank’s net profits during the applicable dividend period without prior approval by the Federal Reserve.

At September 30, 2017, the Bank could pay dividends of approximately $13,000,000 with approval of the Bank regulators.

 

(10) STOCK OPTIONS

The Company has granted incentive stock options to certain officers of Patriot Bank. The options granted are to purchase Company common stock at not less than fair market value at date of grant. Options are generally exercisable annually in cumulative installments of 20% and fully vest upon a change of control.

 

18


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(10) STOCK OPTIONS (continued)

 

The following summarizes stock option activity for 2017 and 2016:

 

     Shares      Exercise
Price Range
 

Outstanding as of December 31, 2015

     2,020      $ 1,000-$1,500  

Granted

     500      $ 1,500  

Cancelled

     —          —    

Exercised

     —          —    
  

 

 

    

 

 

 

Outstanding as of December 31, 2016

     2,520      $ 1,000-$1,500  

Granted

     —          —    

Cancelled

     —          —    

Exercised

     —          —    
  

 

 

    

 

 

 

Outstanding as of September 30, 2017

     2,520      $ 1,000-$1,500  
  

 

 

    

 

 

 

As of September 30, 2017 and December 31, 2016, 1,446 shares and 1,122 shares were exercisable at prices ranging from $1,000 to $1,500 per share.

Stock-based compensation expense recognized in the accompanying consolidated statements of income amounted to $62,121 and $49,702 for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, there was $160,220 of unrecognized compensation cost.

 

(11) RELATED PARTY TRANSACTIONS

In the ordinary course of business, officers, directors and employees of the Bank are customers of and engage in transactions with the Bank. These transactions are on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk or present other unfavorable features. Loans to such parties are made in accordance with terms and policies of the Bank and are specifically authorized by the Board of Directors. Aggregate loans, owed to the Bank by such persons, were approximately $7,440,000 and $6,588,000 at September 30, 2017 and December 31, 2016, respectively. Deposits from related parties held by the Bank at September 30, 2017 and December 31, 2016 amounted to approximately $2,849,000 and $5,600,000, respectively.

 

(12) COMMITMENTS AND CONTINGENT LIABILITY

Loans – In the normal course of business, the Bank makes commitments under standby letters of credit that are not reflected in the accompanying financial statements. Commitments under these standby letters of credit aggregated approximately $982,291 and $727,000 at September 30, 2017 and December 31, 2016, respectively.

 

19


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(12) COMMITMENTS AND CONTINGENT LIABILITY (continued)

 

The Bank is committed to fund unused portions of lines of credit and construction loans to borrowers in compliance with the related loan agreements that are not reflected in the accompanying financial statements. At September 30, 2017 and December 31, 2016, the unused portions of lines of credit and construction loans aggregated approximately $46,400,000 and $34,800,000, respectively.

The Bank does not anticipate any material losses as a result of these commitments.

 

(13) LITIGATION

The Bank is subject to various claims and lawsuits which arise primarily in the ordinary course of business. There are no outstanding or unresolved claims or lawsuits.

 

(14) REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The 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 of Common Equity Tier 1 Capital (“CETI”), Tier 1 Capital, Total Capital and leverage ratio of Tier 1 Capital. The requirements are:

 

    4.5% based upon CETI,

 

    6.0% based upon Tier 1 Capital,

 

    8.0% based on total regulatory capital, and

 

    Leverage ratio of Tier 1 Capital assets equal to 4%.

As of September 30, 2017 and December 31, 2016, management believes the Bank met all capital adequacy requirements to which they are subject. As of September 30, 2017, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

 

20


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(14) REGULATORY CAPITAL REQUIREMENTS (continued)

 

The Bank’s actual capital amounts and ratios are presented in the following table (in thousands):

 

     Actual     Minimum Required
For Capital Adequacy
Under Basel III Phase-In
    Minimum Required For
Capital Adequacy Under
Basel III Fully Phased-In
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2017

               

Common Equity Tier I Ratio

   $ 34,195        10.47   $ 17,140        >5.25   $ 22,854        > 7.0

Tier I Capital to Risk Weighted Assets

   $ 34,195        10.47   $ 21,629        >6.625   $ 27,751        > 8.5

Total Risk Based Capital to Risk Weighted Assets

   $ 38,250        11.72   $ 28,159        >8.625   $ 34,281        >10.5

Tier I Capital to Average Assets

   $ 34,195        10.27   $ 13,321        >4.0   $ 13,321        > 4.0

December 31, 2016

               

Common Equity Tier I Ratio

   $ 30,568        10.61   $ 14,765        >5.125   $ 20,168        > 7.0

Tier I Capital to Risk Weighted Assets

   $ 30,568        10.61   $ 19,087        >6.625   $ 24,490        > 8.5

Total Risk Based Capital to Risk Weighted Assets

   $ 34,172        11.86   $ 24,850        >8.625   $ 30,252        >10.5

Tier I Capital to Average Assets

   $ 30,568        10.03   $ 12,192        >4.0   $ 12,182        > 4.0

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

These techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value accounting guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset, a change in valuation technique or the use of multiple valuation techniques may be appropriate.

 

21


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES (continued)

In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Company groups its financial assets and liabilities generally measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.

 

    Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity 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 or 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 may include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the 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.

When available, the Company attempts to use quoted market prices to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices are not available, fair value is often determined using model-based techniques incorporating various assumptions, including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the extent to which the valuation inputs are based on market data obtained from independent sources.

 

22


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

 

     September 30, 2017      December 31, 2016  
     Fair Value      Carrying
Value
     Fair Value      Carrying
Value
 
     (in Thousands)      (in Thousands)  

Financial Assets:

           

Cash and cash equivalents

   $ 11,164      $ 11,164      $ 24,420      $ 24,420  

Federal Reserve Bank and Federal Home Loan Bank stock

     1,610        1,610        1,284        1,284  

Loans Held for Sale

     27,126        27,126        23,715        23,715  

Loans, net

     292,925        278,119        253,830        241,000  

Interest receivable

     804        804        756        756  

Financial Liabilities:

           

Deposits

     267,755        277,529        255,423        265,490  

Other Borrowings

     14,259        14,259        2,315        2,300  

Interest Payable

     165        165        134        134  

Off-Balance Sheet Commitments:

           

Standby Letters of Credit

     982        982        727        727  

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents and Interest Bearing Deposits in Banks – The carrying value approximates their fair values.

Loans Held for Sale – The carrying value approximates its fair value.

Loans – The fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and credit quality.

Interest Receivable – The carrying value approximates its fair value.

Deposits – The fair values disclosed for demand deposits (for example, interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings – The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

 

23


CACHE HOLDINGS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Nine Months ended September 30, 2017 and 2016 and Year ended December 31, 2016

 

(15) FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

Interest Payable – The carrying value approximates the fair value.

Off-Balance Sheet Instruments – Fair values for the Company’s off-statement-of-financial-condition instruments (unused lines of credit and letters of credit), which are based upon fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and counterparties’ credit standing, are not significant. Many of the Company’s off-balance sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements.

 

(16) CONCENTRATIONS

The Company held approximately $224,500,000 and $156,384,000 at September 30, 2017 and December 31, 2016, respectively, in loans collateralized by real estate.

 

(17) SUBSEQUENT EVENTS

Cache Holdings, Inc. and its subsidiary, Patriot Bank, have agreed to be acquired by Equity Bancshares, Inc. The acquisition, which was subject to regulatory approval, was completed in the fourth quarter of 2017.

* * * * *

 

2 4

EX-99.3

Exhibit 99.3

INDEX TO FINANCIAL STATEMENTS OF EASTMAN

 

Audited Consolidated Financial Statements of Eastman National Bancshares, Inc.:

  

Report of Independent Registered Public Accounting Firm

     F-1  

Consolidated Balance Sheets as of December 31, 2016 and 2015

     F-2  

Consolidated Statements of Income for the Years Ended December 31, 2016 and 2015

     F-3  

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016 and 2015

     F-4  

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015

     F-5  

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015

     F-6  

Notes to Consolidated Financial Statements

     F-7  


LOGO

Independent Auditor’s Report

The Board of Directors

Eastman National Bancshares, Inc.

Newkirk, Oklahoma

We have audited the accompanying consolidated financial statements of Eastman National Bancshares, Inc., 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 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.

Auditor’s 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 from 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.

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 consolidated financial position of Eastman National Bancshares, Inc. as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

LOGO

Little Rock, Arkansas

August 14, 2017

 

LOGO

 

F-1


EASTMAN NATIONAL BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2016 and 2015

 

     2016     2015  
ASSETS     

Cash and due from banks

   $ 9,343,385     $ 7,645,239  

Federal funds sold

     79,739       1,233,615  
  

 

 

   

 

 

 

Total cash and cash equivalents

     9,423,124       8,878,854  

Time deposits in other banks

     —         249,000  

Available-for-sale investment securities

     56,595,308       67,984,945  

Loans, net of allowance for loan losses

     177,994,351       169,782,676  

Premises and equipment, net

     1,898,806       1,975,884  

Foreclosed assets held for sale

     35,382       24,000  

Federal Reserve Bank and Federal Home Loan Bank stock

     438,650       452,250  

Deferred income taxes

     1,188,114       932,696  

Accrued interest receivable

     951,491       1,075,971  

Other assets

     369,008       521,535  
  

 

 

   

 

 

 

Total assets

   $ 248,894,234     $ 251,877,811  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Deposits:

    

Demand

   $ 66,327,444     $ 68,503,246  
  

 

 

   

 

 

 

Total non-interest-bearing deposits

     66,327,444       68,503,246  
  

 

 

   

 

 

 

Savings, NOW, and money market

     113,489,181       112,513,521  

Time

     27,229,064       23,970,399  
  

 

 

   

 

 

 

Total interest-bearing deposits

     140,718,245       136,483,920  
  

 

 

   

 

 

 

Total deposits

     207,045,689       204,987,166  

Retail repurchase agreements

     10,174,289       12,015,375  

Federal Home Loan Bank advances

     2,162,000       7,045,400  

Dividends payable

     4,988,516       2,209,909  

Accrued interest payable and other liabilities

     272,952       229,433  
  

 

 

   

 

 

 

Total liabilities

     224,643,446       226,487,283  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock, $0.10 par value; 500,000 shares authorized; 197,970 shares issued; 191,866 and 192,166 shares outstanding in 2016 and 2015, respectively

     19,797       19,797  

Additional paid-in capital

     2,559,811       2,559,811  

Retained earnings

     23,321,002       24,005,206  

Accumulated other comprehensive loss

     (421,832     (21,170

Treasury stock, 6,104 and 5,804 shares in 2016 and 2015, respectively, at cost

     (1,227,990     (1,173,116
  

 

 

   

 

 

 

Total stockholders’ equity

     24,250,788       25,390,528  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 248,894,234     $ 251,877,811  
  

 

 

   

 

 

 

See accompanying notes

 

F-2


EASTMAN NATIONAL BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2016 and 2015

 

     2016     2015  

Interest income:

    

Loans, including fees

   $ 9,864,139     $ 9,292,015  

Investment securities, taxable

     935,122       770,483  

Investment securities, nontaxable

     119,078       142,596  

Federal funds sold and other

     22,289       48,247  
  

 

 

   

 

 

 

Total interest income

     10,940,628       10,253,341  
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     275,112       236,912  

Retail repurchase agreements

     14,922       12,890  

Federal Home Loan Bank advances

     7,012       24  
  

 

 

   

 

 

 

Total interest expense

     297,046       249,826  
  

 

 

   

 

 

 

Net interest income

     10,643,582       10,003,515  

Provision for loan losses

     125,000       126,939  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     10,518,582       9,876,576  
  

 

 

   

 

 

 

Non-interest income:

    

Service charges on deposits

     2,155,407       1,846,849  

Net gains on sales of investment securities

     309,490       17,638  

Net gains (losses) on sales and write-downs of foreclosed assets

     (2,000     9,770  

Other

     124,690       155,819  
  

 

 

   

 

 

 

Total non-interest income

     2,587,587       2,030,076  
  

 

 

   

 

 

 

Non-interest expenses:

    

Salaries and employee benefits

     3,457,426       3,392,648  

Occupancy and equipment

     624,306       512,063  

Data processing

     700,346       613,341  

Professional fees

     244,937       373,165  

Advertising and business development

     222,774       264,628  

FDIC Insurance

     125,402       118,467  

Other

     1,066,165       1,020,313  
  

 

 

   

 

 

 

Total non-interest expense

     6,441,356       6,294,625  
  

 

 

   

 

 

 

Income before income taxes

     6,664,813       5,612,027