10-K Annual Report 12-31-2015 - Quarry City Savings and Loan

Transcription

UNITED STATES
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
For the fiscal year ended December 31, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
FDIC Certificate No. 28776
QUARRY CITY SAVINGS AND LOAN ASSOCIATION.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of
incorporation or organization)
44-0400090
(I.R.S. Employer
Identification Number)
713 PCA Road, Warrensburg, Missouri
(Address of principal executive offices)
64093
(Zip Code)
Registrant's telephone number, including area code: (660) 747-5513
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ]
NO [X]
NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). YES [ ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ]
NO [X]
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, as of the end of its last completed
second fiscal quarter, computed by reference to the closing price of the common stock on June 30, 2015, was $3.5 million.
As of March 23, 2016, there were issued and outstanding 407,691 shares of the Registrant’s Common Stock with a par value of $0.01 per share.
TABLE OF CONTENTS
ITEM 1.
Business ....................................................................................................................... 2
ITEM 1A. Risk Factors ............................................................................................................... 31
ITEM 1B. Unresolved Staff Comments ...................................................................................... 31
ITEM 2.
Properties ................................................................................................................... 31
ITEM 3.
Legal Proceedings ...................................................................................................... 31
ITEM 4.
Mine Safety Disclosures. ........................................................................................... 32
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities .................................................................................................. 32
ITEM 6.
Selected Financial Data.............................................................................................. 32
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................................................................. 32
ITEM 8.
Financial Statements and Supplementary Data.......................................................... 47
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................................................................................. 47
ITEM 9A Controls and Procedures ............................................................................................ 47
ITEM 9B. Other Information ...................................................................................................... 48
ITEM 10. Directors, Executive Officers and Corporate Governance ........................................ 48
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .................................................................................................................. 48
ITEM 13. Certain Relationships and Related Transactions and Director Independence ........... 49
ITEM 14. Principal Accountant Fees and Services .................................................................... 49
ITEM 15. Exhibits and Financial Statement Schedules ............................................................. 50
Financial Statements ......................................................................................................... F-1
PART I
ITEM 1.
Business
This Annual Report contains forward-looking statements, which can be identified by the use of
words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,”
“will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words
of similar meaning. These forward-looking statements include, but are not limited to:
•
statements of our goals, intentions and expectations;
•
statements regarding our business plans, prospects, growth and operating strategies;
•
statements regarding the asset quality of our loan and investment portfolios; and
•
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are
inherently subject to significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are subject to change. We are
under no duty to and do not take any obligation to update any forward-looking statements after the date of
this Annual Report.
The following factors, among others, could cause actual results to differ materially from the
anticipated results or other expectations expressed in the forward-looking statements:
•
general economic conditions, either nationally or in our market area, that are worse than
expected;
•
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins or reduce
the fair value of financial instruments;
•
adverse changes in the securities markets;
•
changes in laws or government regulations or policies affecting financial institutions,
including changes in regulatory fees and capital requirements;
•
our ability to capitalize on growth opportunities;
•
our ability to successfully integrate acquired branches, if any;
•
changes in consumer spending, borrowing and savings habits;
•
changes in accounting policies and practices, as may be adopted by the bank regulatory
agencies, the Financial Accounting Standards Board, the Securities and Exchange
Commission and the Public Company Accounting Oversight Board;
•
changes in our organization, compensation and benefit plans;
2
•
changes in our financial condition or results of operations that reduce capital available to
pay dividends; and
•
changes in the financial condition or future prospects of issuers of securities that we own.
Because of these and a wide variety of other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking statements.
General
Quarry City Savings and Loan Association
Quarry City Savings and Loan Association (“Quarry City” or the “Association”) is a Missourichartered savings and loan association headquartered in Warrensburg, Missouri. Warrensburg is the
County Seat of Johnson County, Missouri, which is located in west central Missouri, approximately 50
miles east of Kansas City. Quarry City was organized in 1890 under the name Quarry City Building and
Loan Association and has operated continuously in Warrensburg, Missouri since its founding. Steve
Andrew, our President and Chief Executive Officer, has been employed with Quarry City since 1971 and
has served as President and Chief Executive Officer since 1991. David Andrew, our Executive Vice
President and Chief Financial Officer, is the brother of Steve Andrew and has been employed with Quarry
City since 1975. From 1971 until 1991, Gene Andrew, the father of Steve and David Andrew, served as
our President and Chief Executive Officer.
We offer financial services to individuals, families and businesses through our office located in
Warrensburg, Missouri. At December 31, 2015, we had total assets of $51.0 million, net loans of $37.8
million, total deposits of $42.7 million and stockholders’ equity of $8.2 million.
Our business consists primarily of accepting deposits from the general public and investing those
deposits, together with funds generated from operations, and to a lesser extent borrowings, in one- to
four-family residential real estate loans; construction loans; commercial real estate, multi-family and land
loans; agricultural real estate loans; and commercial and agricultural non-real estate loans. To a lesser
extent, we also originate consumer loans. We offer a variety of deposit accounts, including passbook
accounts, certificates of deposit, commercial and regular checking accounts and individual retirement
accounts.
In July 2013, the Association completed its mutual to stock conversion and invested the proceeds
from the sale of its common stock, along with existing cash equivalents, primarily in single-family
residential, construction, commercial real estate and multi-family loans.
Our executive offices are located at 713 PCA Road, Warrensburg, Missouri 64093. Our telephone
number at this address is (660) 747-5513. Our website address is www.quarrycity.com. Information on
our website is not incorporated into or considered a part of this annual report.
Market Area
We conduct our operations from our office located in Warrensburg, Missouri, which is the county
seat of Johnson County, Missouri, located in west central Missouri. We consider Johnson County,
Missouri to be our primary market area.
Johnson County is located approximately 50 miles east of Kansas City, Missouri, and consists
primarily of small towns and rural areas. Johnson County has experienced some population growth since
2000 but remains a sparsely populated area, with an estimated 2014 population of 55,000 persons.
3
According to the U.S. Census, from 2009 through 2013, average family income in Johnson County was
$47,000, compared to the Missouri and national averages during this period of $47,000 and $53,000,
respectively.
The regional economy is fairly diversified, and education, services, agriculture, wholesale/retail
trade and government are the primary employers. Warrensburg, Missouri is home to the University of
Central Missouri which was founded in 1871 and serves approximately 2,100 graduate and 9,500
undergraduate students. Additionally, Whiteman Air Force Base, which was founded in 1942 and is a
primary base for the B-2 stealth bomber, is located in Johnson County and has recently expanded
operations resulting from the Base Realignment and Closure Commission. Also, agriculture, and
particularly livestock, corn and soybeans, are an important part of the local economy, and the prices for
these commodities have increased significantly in recent years.
Although real estate values have declined throughout our market area in recent years, we believe
that we have experienced relative price or value stability compared to many other parts of the country, in
part because we did not experience the significant increases in real estate values that some parts of the
country experienced between 2000 and 2007. Additionally, we believe the University of Central Missouri
and Whiteman AFB have helped stabilize housing in our market area.
Competition
We face intense competition in our market areas both in making loans and attracting deposits.
We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions,
finance companies, mutual funds and insurance companies. Some of our competitors have greater name
recognition and market presence, and offer certain services that we do not or cannot provide.
Additionally, we face strong competition for our agricultural lending from the Farm Credit Services of
America, a division of the Federal Farm Credit System, a government-sponsored entity.
Our deposit sources are primarily concentrated in the communities surrounding our banking
office in Warrensburg, Missouri. As of June 30, 2015 (the latest date for which information is publicly
available), we ranked 6th in deposit market share out of nine banks and thrift institutions with offices in
Johnson County, Missouri with a market share of approximately 7.3%, which data do not include deposits
held by credit unions with which we also compete.
Lending Activities
Our primary lending activities are the origination of one- to four-family residential real estate
loans; construction loans; commercial, multi-family and land loans; agricultural real estate loans; and
commercial and agricultural non-real estate loans. To a lesser extent, we also originate consumer loans.
4
Loan Portfolio Composition. The following table sets forth the composition of our loan
portfolio, including loans held for sale, by type of loan at the dates indicated. Substantially all of our
loans are made to residents of Johnson County, Missouri and would be similarly affected by economic
conditions there. Other than as disclosed herein, there are no other loan concentrations that would exceed
10% of our loan portfolio.
At December 31,
2014
2015
Amount
Percent
Amount
Percent
Real estate loans:
One- to four-family residential (1) .............
Construction ..............................................
Commercial, multi-family and land ..........
Agricultural ...............................................
Commercial and agricultural
non-real estate .......................................
Consumer ......................................................
Total loans.............................................
$ 21,240,563
5,975,458
10,353,613
2,748,229
50.3%
14.2
24.5
6.5
$ 20,565,629
5,811,564
11,487,158
2,848,708
48.2%
13.6
26.9
6.8
954,062
917,530
$ 42,189,455
2.3
2.2
100.0%
1,157,550
779,353
$ 42,649,962
2.7
1.8
100.0%
Other items:
Deferred loan costs, net .............................
Allowance for loan losses .........................
Accretable discount (2) (3) ...........................
Credit quality discount (2) (4).......................
Deferred income ........................................
Loans in process ........................................
Total loans, net......................................
(5,237)
(485,561)
(12,037)
(649)
(57,005)
(3,416,891)
$ 38,212,075
(1)
(2)
(3)
(4)
564
(485,561)
(12,037)
(7,814)
(59,109)
(2,678,046)
$ 39,407,959
Includes loans held for sale of $451,029 and $656,510 at December 31, 2015 and December 31, 2014, respectively.
Relates to remaining discounts on $483,000 in loans acquired on April 28, 2010 from the FDIC for $300,000 in cash.
Represents the excess cash flows expected to be collected over Quarry City’s initial investment in the loan.
Represents the loan’s contractually required payments in excess of the amount of cash flows expected to be collected.
5
Contractual Maturities. The following table sets forth the contractual maturities of our total loan
portfolio, including loans held for sale, at December 31, 2015. Demand loans, loans having no stated
repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The
table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual
maturities may differ due to prepayments.
Due During the Years Ending
December 31,
2016 ...................................................
2017 ...................................................
2018 ...................................................
2019 to 2020 ......................................
2021 to 2025 ......................................
2026 to 2030 ......................................
2031 and beyond................................
Total .................................
One- to fourfamily
residential
real estate
Amount
Construction
Amount
$
3,402,430
1,558,631
631,994
1,331,688
2,814,697
3,402,183
8,098,940
$
5,975,458
—
—
—
—
—
—
$ 3,622,643
1,910,628
1,093,911
2,666,367
258,332
711,930
89,802
$
$ 21,240,563
$
5,975,458
$ 10,353,613
$ 2,748,229
Commercial
and
agricultural
non-real
estate
Amount
Commercial,
multi-family
and land
Amount
Consumer
Amount
Agricultural
Amount
Total
Amount
Due During the Years Ending
December 31,
2016 .................................................... $
2017 ....................................................
2018 ....................................................
2019 to 2020 .......................................
2021 to 2025 .......................................
2026 to 2030 .......................................
2031 and beyond ................................
466,726
89,529
58,958
311,336
27,513
—
—
$
303,331
21,003
82,885
122,135
—
—
388,176
$ 14,644,708
3,674,886
2,096,562
4,753,148
3,293,909
4,597,415
9,128,827
Total ................................. $
954,062
$
917,530
$ 42,189,455
6
874,120
95,095
228,814
321,622
193,367
483,302
551,909
The following table sets forth our fixed- and adjustable-rate loans, including loans held for sale,
at December 31, 2015 that are contractually due after December 31, 2016.
Due After December 31, 2016
Adjustable
Total
Fixed
Real estate loans:
One- to four-family residential ........................... $ 16,104,148
6,217,702
Commercial, multi-family and land ....................
1,349,732
Agricultural .........................................................
487,336
Commercial and agricultural non-real estate...........
223,930
Consumer .................................................................
Total loans...................................................... $ 24,382,848
$
1,733,985
513,268
524,377
—
390,269
$ 17,838,133
6,730,970
1,874,109
487,336
614,199
$
3,161,899
$ 27,544,747
Loan Approval Procedures and Authority. We make loans according to written, nondiscriminatory underwriting standards and loan origination procedures established by our board of
directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and
value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the
borrower’s employment and credit history and information on the historical and projected income and
expenses of the borrower. We require “full documentation” on all of our loan applications.
Our policies and loan approval limits are established by the board of directors. For secured
transactions, our Vice President, Secondary Market Loan Operations has loan authority of up to $100,000
and our President and Chief Executive Officer has loan authority of up to $200,000. Additionally our
President and Chief Executive Officer has loan authority for unsecured loans of up to $25,000. Our
management loan committee has loan authority for secured and unsecured loans of up to $500,000, and
all loans above $500,000 require the approval of the board of directors. Generally all loans, other than
smaller consumer loans are approved by the full loan committee, and all loans not requiring board
approval are ratified at the next regularly scheduled board meeting.
We require appraisals or in-house evaluations of all real property securing one- to four-family
residential real estate loans, home equity loans, and commercial real estate loans and lines of credit. All
appraisers are state-licensed or state-certified appraisers, and our practice is to have local appraisers
approved by the board of directors annually.
One- to Four-Family Residential Mortgage Loans. At December 31, 2015, $21.2 million, or
50.3% of our total loan portfolio, consisted of one- to four-family residential real estate loans. We offer
fixed-rate residential mortgage loans with maturities up to 30 years. Historically we have also offered
adjustable-rate residential mortgage loans. Under the regulations of the Missouri Division of Finance,
state-chartered savings associations, like Quarry City, are permitted to make adjustable-rate residential
mortgages with rates tied to an index that is not within the control of the savings association or rollover
mortgages with a rate tied to an index that may be within the control of the association. In recent years in
the historically low interest rate environment, a substantial portion of our one-to four family residential
real estate loan originations have fixed-rates of interest. Since 2009, consistent with our strategy to
increase our non-interest income while addressing interest rate risk, we have sold a substantial portion of
our fixed-rate, conforming one-to four family residential real estate loans with maturities of 15 years or
greater.
Generally we do not require borrowers to escrow funds for the payment of taxes and insurance;
however, we retain the right to make these payments on behalf of the borrower, and will add any such
payments we make to the loan principal amount.
7
One- to four-family residential mortgage loans are generally underwritten according to Freddie
Mac or Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming
loans.” We generally originate one- to four-family residential real estate loans in amounts up to the
maximum conforming loan limits as established by the Federal Housing Finance Agency, which is
generally $417,000 for single-family homes. However, loans in excess of $417,000 (which are referred to
as “jumbo loans”) may be originated for retention in our loan portfolio. On occasion, we may also
originate jumbo loans and sell the conforming piece of the loan to the FHLB of Des Moines and retain in
our portfolio the amount of the loan in excess of the conforming limit as a second mortgage loan. We
generally underwrite jumbo loans in the same manner as conforming loans.
Generally, we originate loans with loan-to-value ratios of up to 80%, and will, on occasion,
originate loans with loan-to-values of up to 89%. In the future we may consider originating loans with
loan-to-value ratios of up to 95%, with any loans in excess of 90% requiring private mortgage insurance.
During the years ended December 31, 2015 and 2014, we did not originate a material amount of one- to
four-family residential real estate loans with loan-to-value ratios in excess of 80%.
We currently retain the servicing rights on certain loans sold to generate ongoing fee income. For
the year ended December 31, 2015, we received loan servicing fees of $81,000. As of December 31,
2015, we had $451,000 in loans held for sale. As of December 31, 2015, the principal balance of loans
serviced for others totaled $32.7 million.
Other than our loans for the construction of one- to four-family residential mortgage loans, we do
not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower
pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do
not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where
the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance
during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with
weakened credit histories typically characterized by payment delinquencies, previous charge-offs,
judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit
scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full
documentation).
Commercial Real Estate, Multi-family and Land Loans. At December 31, 2015, $10.4 million,
or 24.5%, of our total loan portfolio, consisted of commercial real estate, multi-family and loans secured
by undeveloped land. Properties securing our commercial real estate loans primarily include business
owner-occupied properties, small office buildings and self-storage facilities. At December 31, 2015, our
commercial real estate, multi-family and land loans had an average balance of $138,000. Substantially all
of our commercial real estate, multi-family and land loans are secured by properties located in our
primary market area. At December 31, 2015, our largest commercial real estate, multi-family and land
loan had a principal balance of $1.8 million, and was secured by several multi-family real estate
properties and one commercial real estate property located in Warrensburg, Missouri. This loan
relationship was performing in accordance with its repayment terms at December 31, 2015.
We originate fixed-rate and adjustable-rate loans secured by multi-family properties, typically
apartment complexes. Multi-family loans generally amortize over 20 years. We generally lend up to
75% of the multi-family property’s appraised value. Appraised values are determined by an outside
independent appraiser. In deciding to originate a loan secured by a multi-family property, we review the
creditworthiness of the borrower, the expected cash flows from the property securing the loan, the cash
flow requirements of the borrower, the value of the property securing the loan and the team managing the
8
property. We generally obtain the personal guarantee of the principals when originating a loan secured by
multi-family real estate.
We also will originate loans secured by land primarily for the purpose of constructing singlefamily residences. At December 31, 2015, land loans totaled $1.3 million.
In the underwriting of commercial real estate, multi-family and land loans, we generally lend up
to the lesser of 75% of the property’s appraised value or purchase price. We base our decision to lend
primarily on the economic viability of the property and the creditworthiness of the borrower. In
evaluating a proposed commercial real estate and multi-family loan, we emphasize the ratio of the
property’s projected net cash flow to the loan’s debt service requirement (generally requiring a ratio of
1.20x), computed after deduction for a vacancy factor and property expenses we deem appropriate.
Personal guarantees are generally obtained from commercial real estate, multi-family and land loan
borrowers. We require title insurance, fire and extended coverage casualty insurance, and, if appropriate,
flood insurance, in order to protect our security interest in the underlying property. All of our commercial
real estate, multi-family and land loans are generated internally by our loan officers.
Commercial real estate, multi-family and land loans generally carry higher interest rates and have
shorter terms than one- to four-family residential mortgage loans. Commercial real estate and multifamily loans, however, entail greater credit risks compared to the one- to four-family residential mortgage
loans we originate, as they typically involve larger loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment of loans secured by income-producing properties
typically depends on the successful operation of the property, as repayment of the loan generally is
dependent, in large part, on sufficient income from the property to cover operating expenses and debt
service. Changes in economic conditions that are not in the control of the borrower or lender could affect
the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in
real estate values may be more pronounced for commercial real estate and multi-family properties than
residential properties.
Agricultural Real Estate Loans. At December 31, 2015, $2.7 million, or 6.5% of our total loan
portfolio, consisted of agricultural real estate loans which are loans to finance the acquisition,
development or refinancing of agricultural real estate. The primary farming commodities in our market
area are livestock, corn and soybeans. We consider a number of factors in originating agricultural real
estate loans. We evaluate the qualifications and financial condition of the borrower, including credit
history, profitability and expertise, as well as the value and condition of the agricultural property securing
the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the
borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment
history with us and other financial institutions. In evaluating the property securing the loan, the factors
we consider include the net operating income of the mortgaged property before debt service and
depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt
service coverage ratio (the ratio of net operating income to debt service). Many of our agricultural real
estate loans are made to borrowers who derive the majority of their income from non-farming related
sources but do derive a portion of their income from the property they are financing. Many of these loans
include the borrower’s primary residence but are classified as an agricultural loan, as opposed to a one- to
four-family residential real estate loan, because the value of the land is greater than the residence.
Our agricultural real estate loans generally are originated with loan to value ratios that do not
exceed 80% and typically amortize over a period not exceeding 20 years. At December 31, 2015, our
largest agricultural real estate loan relationship had an aggregate principal balance of $590,000 and was
performing in accordance with its repayment terms. We utilize the same underwriting procedures and
9
criteria in the origination of agricultural real estate loans as we utilize for the origination of our
commercial real estate, multi-family and land loans.
Agricultural real estate lending affords us the opportunity to earn higher yields than those
obtainable on one- to four-family residential lending. Nevertheless, agricultural real estate lending may
involve greater risk than one- to four-family residential real estate loans because the loans generally have
larger principal balances and repayment of agricultural real estate loans is dependent on the successful
operation or management of the farm property securing the loan. The success of the loan may also be
affected by many factors outside the control of the borrower.
Weather presents one of the greatest risks to agricultural real estate lending as hail, drought,
floods, or other conditions, can severely limit crop yields and thus impair loan repayments and the value
of the underlying collateral. This risk can be mitigated by the farmer with crop insurance that can help to
ensure loan repayment. For instance, farmers are able to obtain multi-peril crop insurance through a
program partially subsidized by the Federal government. Grain and livestock prices also present a risk as
prices may decline prior to sale resulting in a failure to cover production costs. These risks may be
reduced by the farmer with the use of futures contracts or options to mitigate price risk. Another risk is
the uncertainty of government programs and other regulations. During periods of low commodity prices,
the income from government programs can be a significant source of cash to make loan payments and if
these programs are discontinued or significantly changed, cash flow problems or defaults could result.
Finally, the success of many farms depends on the presence of a limited number of key individuals.
Commercial and Agricultural Non-Real Estate Loans. We originate commercial and
agricultural non-real estate loans to borrowers located in our market area which are either unsecured or
secured by collateral other than real estate. Commercial and agricultural non-real estate loans totaled $1.0
million, or 2.3%, of our total loan portfolio at December 31, 2015. Commercial non-real estate loans are
generally secured by equipment and inventory. These loans have various maturities, from one year
(generally, for a line of credit) to five years, generally with a term or balloon payment at the end of the
term. Agricultural non-real estate loans consist of term loans used to fund the purchase of equipment and
livestock, and seasonal operating lines of credit to grain and livestock farmers. Specific underwriting
standards have been established for agricultural non-real estate loans including the establishment of
projections for the upcoming operating year based on industry estimates. Operating lines of credit are
typically written for one year and are secured by the crop to be harvested and other farm assets. On a
limited basis, we will originate short-term unsecured commercial non-real estate loans in those instances
where the applicant’s financial strength and creditworthiness has been established. Commercial and
agricultural non-real estate loans generally bear higher interest rates than residential mortgage loans, but
they also may involve a higher risk of default since their repayment is generally dependent on the
successful operation of the borrower’s business. We generally obtain personal guarantees from the
borrower or a third-party as a condition to originating a commercial or agricultural non-real estate loans.
During the year ended December 31, 2015, we originated $395,000 of commercial and
agricultural non-real estate loans. At December 31, 2015, our largest commercial non-real estate loan
relationship had an aggregate principal balance of $57,000 and was 12 days past due. At December 31,
2015, our largest agricultural non-real estate loan was a line of credit of $91,000, secured by farm
machinery and equipment.
Our underwriting standards for commercial and agricultural non-real estate loans include a
determination of the applicant’s ability to meet existing obligations and payments on the proposed loan
from normal cash flows generated in the applicant’s business. We assess the financial strength of each
applicant through the review of financial statements and tax returns provided by the applicant. The
10
creditworthiness of an applicant is derived from a review of credit reports as well as a search of public
records. We periodically review business loans following origination. We request financial statements at
least annually and review them for substantial deviations or changes that might affect repayment of the
loan. Our loan officers also visit the premises of borrowers to observe the business premises, facilities,
and personnel and to inspect the pledged collateral. Underwriting standards for business loans are
different for each type of loan depending on the financial strength of the applicant and the value of
collateral offered as security.
Construction Loans. We make construction loans for rental properties, commercial buildings
and homes built by developers. On occasion we make loans to developers for subdivisions on
undeveloped property. Advances on construction loans are made in accordance with a schedule reflecting
the cost of construction, but are generally limited to an 80% loan-to-completed-appraised-value ratio.
Repayment of construction loans on non-residential properties is normally expected from the property’s
eventual rental income, income from the borrower’s operating entity or the sale of the subject property.
In the case of income-producing property, repayment is usually expected from permanent financing upon
completion of construction. We typically provide the permanent mortgage financing on our construction
loans on income-producing property. Construction loans are “interest-only” loans during the construction
period, which typically do not exceed 12 months, and convert to permanent, amortizing financing
following the completion of construction. At December 31, 2015, construction loans totaled $6.0 million,
or 14.2%, of total loans receivable. At December 31, 2015, the undisbursed portion of these construction
loans totaled $3.4 million.
Generally, before making a commitment to fund a construction loan, we require an appraisal of
the property by a state-certified or state-licensed appraiser. We review and inspect properties before
disbursement of funds during the term of the construction loan.
Construction financing generally involves greater credit risk than long-term financing on
improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the
accuracy of the initial estimate of the value of the property at completion of construction compared to the
estimated cost (including interest) of construction and other assumptions. If the estimate of construction
cost is inaccurate, we may be required to advance additional funds beyond the amount originally
committed in order to protect the value of the property. Moreover, if the estimated value of the completed
project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full
repayment of the construction loan upon the sale of the property. Construction loans also expose us to the
risk that improvements will not be completed on time in accordance with specifications and projected
costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Consumer Loans. To a much lesser extent, we offer a variety of consumer loans to individuals
who reside or work in our market area, including new and used automobile loans, home improvement and
home equity loans, recreational vehicle loans, and loans secured by certificates of deposits and other
collateral, including marketable securities. We do not purchase indirect automobile loans from dealers. At
December 31, 2015, consumer loans totaled $918,000, or 2.2% of our loan portfolio. At this date, $3,000
of our consumer loans were unsecured.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes
in interest rates. In addition, management believes that offering consumer loan products helps to expand
and create stronger ties to our existing customer base by increasing the number of customer relationships
and providing cross-marketing opportunities.
11
Consumer and other loans generally have greater risk compared to longer-term loans secured by
improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable
assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan
collections are dependent on the borrower’s continuing financial stability and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
We also offer home equity loans secured by a first or second mortgage on residential property.
Our home equity loans are made with fixed or adjustable rates, and with combined loan-to-value ratios up
to 89% on an owner-occupied principal residence.
Generally we do not make second mortgage loans unless we also hold the first mortgage on the
borrower’s primary residence. For second mortgage loans for which we do not hold the first mortgage, we
have greater risk than one- to four-family residential real estate loans secured by first mortgages. We face
the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure,
particularly since holders of the first mortgage would be repaid first from the proceeds of any sale of
collateral, before such proceeds are applied to second mortgage loans. When customers default on their
loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize
foreclosure and carrying costs. Particularly with respect to our second mortgage loans, decreases in real
estate values could adversely affect the value of property used as collateral for our loans.
Loan Originations, Purchases, Sales, Participations and Servicing
Lending activities are conducted by our loan personnel operating at our office. All loans that we
originate are underwritten pursuant to our standard policies and procedures. In addition, our one- to fourfamily residential real estate loans incorporate underwriting guidelines of the Mortgage Partnership
Finance Xtra Program, a product of the FHLB of Des Moines and other investors. Our ability to originate
loans is dependent upon the relative customer demand for such loans and competition from other lenders,
which is affected by market interest rates as well as anticipated future market interest rates. Our loan
origination and sales activity may be adversely affected by a rising interest rate environment which
typically results in decreased loan demand. Our agricultural real estate, agricultural and commercial nonreal estate loans, and our commercial, multi-family and land loans are generated by our internal business
development efforts and referrals from professional contacts. Our originations of one- to four-family
residential real estate loans and consumer loans are generated by our loan personnel, existing customers,
referrals from realtors, residential home builders and walk-in business.
Consistent with our interest rate risk strategy and the low interest rate environment that has
existed in recent years, we have sold to the Mortgage Partnership Finance Xtra Program on a servicingretained basis, a substantial portion of the conforming fixed-rate, one- to four-family residential real estate
loans that we have originated with terms of 15 years and greater. At December 31, 2015, we serviced
$32.7 million of fixed-rate, one- to four-family residential real estate loans, all of which were owned by
the FHLB of Des Moines.
From time to time, we have entered into loan participations with other banks and borrowers. In
these circumstances, we will generally follow our customary loan underwriting and approval policies. At
December 31, 2015, we had no loan participations.
On April 28, 2010, we acquired $483,000 in loans from the FDIC for $300,000 in cash. These
loans, which were originated by a bank in our market area that went into receivership, are not covered by
an FDIC loss share agreement. At December 31, 2015, the carrying amount of these loans was $130,000.
12
The following table sets forth our loan origination, purchase, sale and principal repayment
activity during the periods indicated.
Years Ended December 31,
2015
2014
$
36,273,474
Total loans, including loans held for sale, at beginning of period ....................... $
39,407,959
Loans originated:
Real estate loans:
One- to four-family residential (1) .....................................................................
Construction ......................................................................................................
Commercial, multi-family and land .................................................................
Agricultural .......................................................................................................
Commercial and agricultural non-real estate loans ..............................................
Consumer loans .....................................................................................................
Total loans originated .......................................................................................
18,253,846
5,131,796
3,159,409
125,000
395,337
632,331
27,697,719
17,009,676
5,445,126
2,748,485
86,157
687,915
471,878
26,449,237
Loans purchased:
Real estate loans:
One- to four-family residential (2) .....................................................................
Total loans purchased .......................................................................................
353,412
353,412
—
—
Loans sold:
Real estate loans:
One- to four-family residential (3) ....................................................................
Total loans sold .................................................................................................
(13,098,769)
(13,098,769)
(11,348,556)
(11,348,556)
Other:
Principal repayments and other ........................................................................
(16,148,246)
(11,966,196)
Net loan activity ...................................................................................................
Total loans, including loans held for sale, at end of period ............................. $
(1)
(2)
(3)
(4)
(1,195,884)
38,212,075
$
3,134,485
39,407,959
Includes loans originated for sale in the secondary market of $12,955,653 and $11,837,766, respectively.
Represents loan repurchased under the FHLB of Des Moines Mortgage Partnership Finance Xtra Program.
Represents loans sold in the secondary market.
Represents loan participation sold.
Non-Performing and Problem Assets
Delinquency Procedures. When a borrower fails to make a required monthly loan payment, a
late notice is generated, generally on the 15th day after the payment due date, stating the payment and late
charges due. A follow-up notice is sent every 15 days thereafter. On a case-by-case basis, we will also
include follow-up phone calls. After a loan is 90 days past due or management has serious doubts about
further collectability of principal or interest, it is placed on nonaccrual status. Our Chief Executive
Officer determines on a case-by-case basis further actions. Generally, we will contact our attorney to
initiate foreclosure procedures. If the loan is reinstated, foreclosure proceedings will be discontinued and
the borrower will be permitted to continue to make payments. The loan will remain on nonaccrual status
until a timely repayment history of six months has been established. The past due report is reviewed and
discussed at the weekly loan committee meeting which is attended by all officers.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real
estate is classified as foreclosed real estate held for sale until it is sold. The real estate is recorded at
estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting
from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new
appraisal or an in-house evaluation which is obtained as soon as practicable, typically at the start of the
foreclosure proceeding and every six months thereafter until the property is sold. Subsequent decreases in
13
the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the property, however, are
capitalized at estimated fair value less estimated costs to sell.
Non-Performing Assets. We generally cease accruing interest on our loans when contractual
payments of principal or interest have become 90 days past due or management has serious doubts about
further collectibility of principal or interest, even though the loan is currently performing. When a loan is
placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on
nonaccrual loans is recorded as income or applied against principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt. Restructured loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the revised contractual terms for a reasonable period of
time (typically six months) and the ultimate collectibility of the total contractual principal and interest is
reasonably assured.
The following table sets forth information regarding our non-performing assets at the dates
indicated. We had no troubled debt restructurings at the dates indicated.
At December 31,
2014
2015
Non-accrual loans:
Real estate loans:
One- to four-family residential ..................
Construction...............................................
Agricultural ................................................
Commercial and agricultural non-real estate...
Consumer .........................................................
Total non-accrual loans ..........................
$
$
Loans delinquent 90 days or more and still
accruing:
Real estate loans:
One- to four-family residential ..................
Construction...............................................
Agricultural ................................................
Commercial and agricultural non-real estate...
Consumer .........................................................
Total loans delinquent 90 days or more
and still accruing ...................................
Total non-performing loans (1)
Foreclosed real estate:
One- to four-family residential................
Total non-performing assets ............................
Ratios:
Non-performing loans to total loans ...........
Non-performing assets to total assets .........
(1)
$
281,405
—
—
—
—
—
281,405
$
$
316,011
—
322,118
—
—
—
638,129
—
—
—
—
—
—
—
—
—
—
—
—
—
281,405
—
638,129
—
—
281,405
0.67%
0.55%
$
638,129
1.50%
1.30%
Loans acquired and accounted for under ASC 310-30 have been excluded, since these loans have been
performing in accordance with their contractual terms.
For the year ended December 31, 2015, gross interest income that would have been recorded had
our non-accruing loans been current in accordance with their original terms and interest income
recognized on such loans was immaterial.
14
At December 31, 2015, nonaccrual loans consisted of four one-to four-family residential loans
totaling $281,000 with allocated allowances of $28,000. One of these loans totaling $119,000 was over
90 days past due, and three loans totaling $162,000 were less than 30 days past due as of December 31,
2015.
At December 31, 2015, we had no loans that were not currently classified as nonaccrual, 90 days
past due or troubled debt restructurings, but where known information about possible credit problems of
borrowers caused management to have serious concerns as to the ability of the borrowers to comply with
existing loan repayment terms and that could result in disclosure as non-accrual, 90 days past due or
troubled debt restructurings.
Troubled Debt Restructurings. Troubled debt restructurings are defined under ASC 310-40 to
include loans for which either a portion of interest or principal has been forgiven, or for loans modified at
interest rates or on terms materially less favorable than current market rates. At December 31, 2015 and
2014, we had $0 in loans that were classified as a troubled debt restructuring.
Delinquent Loans. The following table sets forth our loan delinquencies by type and amount, at
the dates indicated.
Loans Delinquent For
90 Days and Over
30-89 Days
Amount
Number
Amount
Number
At December 31, 2015
Real estate loans:
One- to four-family residential .............
Construction ..........................................
Commercial, multi-family and land ......
Agricultural ...........................................
Commercial and agricultural non-real
estate ........................................................
Consumer .....................................................
Total loans ........................................
Real estate loans:
Construction ..........................................
Agricultural ...........................................
estate ........................................................
Consumer .....................................................
Total loans ........................................
—
—
1
—
—
1
2
7
—
2
—
—
—
9
$
$
$
$
—
—
218,663
—
1
—
—
—
—
73,400
292,063
—
—
1
469,591
—
474,605
—
2
—
2
—
—
—
944,196
—
—
4
$
$
$
$
Total
Number
Amount
119,491
—
—
—
1
—
1
—
$
—
—
119,491
—
1
3
130,806
—
79,232
—
9
—
4
—
$
—
—
210,038
—
—
13
—
—
$ 1,154,234
$
119,491
—
218,663
—
—
73,400
411,554
600,397
—
553,837
—
Foreclosed Real Estate Held for Sale. At December 31, 2015 and 2014, we had no foreclosed
real estate held for sale.
Classified Assets. Federal regulations provide that loans and other assets of lesser quality should
be classified as “substandard”, “doubtful” or “loss” assets. An asset is considered “substandard” if it is
inadequately protected by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the
insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as
“doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added
characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of
currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified
15
as “loss” are those considered “uncollectible” and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets which do not currently
expose the insured institution to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may
establish general allowances in an amount deemed prudent by management to cover probable accrued
losses. General allowances represent loss allowances which have been established to cover probable
accrued losses associated with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is
required to charge-off the amount of such assets. An institution’s determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by the regulatory authorities,
which may require the establishment of additional loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of
assets policy, we regularly review the problem loans in our portfolio to determine whether any loans
require classification in accordance with applicable regulations. Loans are listed on the “watch list”
initially because of emerging financial weaknesses even though the loan is currently performing as
agreed, or because of delinquency status, or if the loan possesses weaknesses although currently
performing. Management reviews the status of each impaired loan on our watch list with the Loan
Committee and then with the full board of directors at the next regularly scheduled board meeting. If the
asset quality of a loan deteriorates, the classification is changed to “special mention,” “substandard,”
“doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more
past due are placed on nonaccrual status and classified “substandard.”
Assets that do not expose us to risk sufficient to warrant classification, but which possess
potential weaknesses that deserve our close attention, are required to be designated as special mention. As
of December 31, 2015, we had $474,000 of assets designated as special mention with an allocated
allowance for losses of $8,000.
We regularly review our asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of our review of our assets at December 31, 2015,
substandard assets consisted of loans of $624,000 with an allocated allowance for losses of $62,000.
There were no doubtful or loss assets at December 31, 2015.
As of December 31, 2015, our largest substandard loan classification amounted to $126,000,
secured by a single family residential property and was current as of December 31, 2015.
See Note 3 to our Financial Statements beginning on page F-1 of this annual report for a
description by loan category of our classified and special mention assets as of December 31, 2015 and
2014.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is
the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the
need to establish allowances against losses on loans on a quarterly basis. When additional allowances are
necessary, a provision for loan losses is charged to earnings.
16
Our methodology for assessing the appropriateness of the allowance for loan losses consists of
two key elements: (1) allocated allowances for impaired loans, and (2) a general valuation allowance for
non-impaired loans. Although we determine the amount of each element of the allowance separately, the
entire allowance for loan losses is available for the entire portfolio.
Allocated Allowances on Impaired Loans. We establish an allocated allowance when loans are
determined to be impaired. Loss is measured by determining the present value of expected future cash
flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and
selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s
personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or
past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated
cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans
secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the
property serving as collateral for the mortgage.
General Valuation Allowance on Non-impaired Loans. We establish a general allowance for
non-impaired loans to recognize the probable losses associated with lending activities. This general
valuation allowance is determined by segregating the loans by loan category and assigning allowance
percentages based on our historical loss experience for the last three years, adjusted for qualitative factors
that could impact the allowance for loan losses. These qualitative factors may include changes in lending
policies and procedures, existing general economic and business conditions affecting our primary market
area, volume and severity of non-performing loans, collateral value, nature and volume of the loan
portfolio and existence and effect of any concentrations of credit and the level of such concentrations,
recent loss experience in particular segments of the portfolio, duration of the current business cycle and
bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their
relevance in the current real estate environment.
We also establish an unallocated allowance to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects the imprecision inherent
in the underlying assumptions used in the methodologies for estimating the general valuation allowance
in the loan portfolio. At December 31, 2015, there was an unallocated allowance for losses on loans of
$142,000.
In addition, as an integral part of their examination process, the Federal Deposit Insurance
Corporation and the Missouri Division of Finance will periodically review our allowance for loan losses.
These agencies may require that we recognize additions to the allowance based on their judgments of
information available to them at the time of their examination.
The allowance for loan losses remained unchanged at $486,000 at both December 31, 2015 and
December 31, 2014. In addition, the allowance for loan losses to total loans receivable, including loans
held for sale, increased to 1.15% at December 31, 2015 from 1.14% at December 31, 2014.
The allowance for loan losses as a percentage of non-performing loans increased to 172.55% at
December 31, 2015 from 76.09% at December 31, 2014. To the best of our knowledge, we have
provided for all losses that are both probable and reasonable to estimate at December 31, 2015 and
December 31, 2014.
Net charge-offs (recoveries) to average loans outstanding were 0.00% for the year ended
December 31, 2015 compared to (0.18)% for the year ended December 31, 2014.
17
The recorded investment in non-acquired impaired loans was $281,000 at December 31, 2015.
These impaired loans consisted of four nonaccrual loans discussed in “– Non-Performing Assets.”
Appraisals are performed by a rotating list of independent, certified appraisers to obtain fair
values on non-homogenous loans secured by real estate. The appraisals are generally obtained when
market conditions change and at the time a loan becomes impaired.
We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly.
While we use the best information available to make evaluations, future adjustments to the allowance may
be necessary if conditions differ substantially from the information used in making the evaluations.
Allowance for Loan Losses. The following table sets forth activity in our allowance for loan
losses for the periods indicated.
At or For the Years Ended
December 31,
2014
2015
Balance at beginning of period .................
$
Charge-offs:
Real estate loans:
Construction ..........................................
Commercial, multi-family and land......
Agricultural ...........................................
estate ..................................................
Consumer ..................................................
Total charge-offs..............................
485,561
$
―
―
―
―
418,367
―
―
―
―
―
―
―
(14,626)
―
(14,626)
Recoveries:
estate......................................................
Consumer loans .....................................
Total recoveries ...............................
―
―
―
―
―
81,820
―
81,820
Net recoveries ...........................................
Provision for loan losses ...........................
―
―
67,194
―
Balance at end of period ...........................
Ratios:
Net charge-offs (recoveries) to
average loans outstanding ....................
Allowance for loan losses to nonperforming loans at end of period ........
Allowance for loan losses to total
loans at end of period ...........................
$
485,561
$
485,561
0.00%
(0.18)%
172.55%
76.09%
1.15%
1.14%
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan
losses allocated by loan category and the percent of loans in each category to total loans at the dates
indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future
losses in any particular category and does not restrict the use of the allowance to absorb losses in other
categories.
18
At December 31,
2014
2015
Allowance for
Loan Losses
Real estate loans:
One- to four-family residential ............
Construction .........................................
Agricultural ...........................................
estate .....................................................
Consumer ..................................................
Unallocated................................................
Total ......................................................
$
$
Percent of
Loans in Each
Category to
Total Loans
120,247
38,921
117,337
41,224
50.3%
14.2
24.5
6.5
25,182
644
142,006
485,561
2.3
2.2
―
100.0%
Allowance for
Loan Losses
$
$
Percent of
Loans in Each
Category to
Total Loans
121,343
48,113
157,133
42,731
48.2%
13.6
26.9
6.8
30,554
371
85,316
485,561
2.7
1.8
―
100.0%
Investments
General. Missouri-chartered savings associations have the authority to invest in various types of
liquid assets, including United States government and government agency obligations, securities of
various federal agencies and government-sponsored entities (including securities collateralized by
mortgages), certificates of deposits of insured banks and savings institutions, municipal and corporate
debt securities, and any other securities authorized for investment by a federal savings association.
U.S. GAAP requires that securities be categorized as “held to maturity,” “trading securities” or
“available for sale,” based on management’s intent as to the ultimate disposition of each security. U.S.
GAAP allows debt securities to be classified as “held to maturity” and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability to hold these securities to
maturity. Securities that might be sold in response to changes in market interest rates, changes in the
security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held
to maturity.”
Investment in securities, other than the stock of the FHLB of Des Moines, has not been an
integral part of our investment strategy in recent years, and we held no investment securities other than
the stock of the FHLB of Des Moines at December 31, 2015 and 2014. Subject to market interest rates
and consistent with our interest rate risk strategy, we would consider purchasing investment securities in
the future.
Sources of Funds
General. Deposits traditionally have been our primary source of funds for our lending activities
and, as applicable, other investments. We also occasionally borrow from the Federal Home Loan Bank of
Des Moines to supplement cash flow needs. Our additional sources of funds are scheduled loan
repayments, loan prepayments, retained earnings and the proceeds of loan sales.
Deposits. We accept deposits primarily from individuals who reside in and businesses located in
Johnson County, Missouri. We rely on our competitive pricing and products, convenient location and
quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range
of interest rates and terms. Our deposit accounts consist of passbook accounts, certificates of deposit,
commercial and regular checking accounts and individual retirement accounts. We introduced checking
accounts in 2009, and for our customers with higher deposit balances, we offer these accounts with
19
interest rates that generally are competitive with money market accounts offered at competing financial
institutions in our market area. Additionally, in 2011 we began offering debit cards and installed an ATM
at our office in late 2013.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a
periodic basis. Deposit rates and terms are based primarily on current operating strategies and market
interest rates, liquidity requirements and our deposit growth goals. At December 31, 2015 and 2014, we
had no brokered deposits.
The following table sets forth the distribution of average total interest-bearing deposits by
account type, for the periods indicated. The average amount of noninterest-bearing checking accounts was
less than 10% of average total deposits.
For The Year Ended
December 31, 2015
Balance
For The Year Ended
December 31, 2014
Weighted
Average
Rate
Percent
Balance
Weighted
Average
Rate
Percent
Deposit type:
Checking accounts................................. $ 10,686,297
Passbook accounts .................................
6,652,758
Certificates of deposit ...........................
22,711,679
26.7%
16.6%
56.7%
0.29%
0.25%
1.09%
$ 10,054,952
6,273,207
19,559,381
28.0%
17.5%
54.5%
0.29%
0.25%
1.13%
Total deposits .................................... $ 40,050,734
100.0%
0.74%
$ 35,887,540
100.0%
0.74%
The following table sets forth all our certificates of deposit classified by interest rate as of the
dates indicated.
At December 31,
2014
2015
Interest Rate Range:
0.01-1.00%
1.01-2.00%
2.01-3.00%
3.01-4.00%
$ 12,480,349
9,417,951
1,164,736
―
$ 12,859,759
6,561,279
2,307,809
2,651
$ 23,063,036
$ 21,731,498
The following table sets forth, by interest rate ranges, information concerning our certificates of
deposit.
Period to Maturity
More Than
More Than
Two to
Three Years
Three Years
Less Than
or Equal to
One Year
More Than
One to
Two Years
Interest Rate Range:
0.01% to 1.00%............ $ 10,543,872
1.01% to 2.00%............
457,641
2.01% to 3.00%............
677,932
3.01% to 4.00%............
—
$ 1,909,897
1,058,409
—
—
$
$ 2,968,306
$ 1,935,786
Total ........................
$ 11,679,445
26,580
1,909,206
—
—
20
$
Total
—
5,992,695
486,804
—
$ 12,480,349
9,417,951
1,164,736
—
$ 6,479,499
$ 23,063,036
Percent of
Total
54.1%
40.8
5.1
0.0
100.0%
As of December 31, 2015, the aggregate amount of outstanding certificates of deposit in amounts
greater than or equal to $100,000 was $7.5 million.
The following table sets forth the maturity of those certificates as of December 31, 2015.
At
December 31, 2015
Three months or less ......................................
Over three months through six months .........
Over six months through one year ................
Over one year to three years ..........................
Over three years .............................................
$
922,325
1,370,522
954,246
1,395,236
2,814,604
Total ...............................................................
$ 7,456,933
Borrowings. At December 31, 2015 we had no advances from the FHLB of Des Moines. At
December 31, 2015, based upon our pledged collateral, we had available credit with the FHLB of Des
Moines of $4.2 million, and we could increase this borrowing limit if we increased our pledged collateral.
Personnel
As of December 31, 2015, we had 14 full-time equivalent employees. Our employees are not
represented by any collective bargaining group. Management believes that we have a good working
relationship with our employees.
Subsidiary Activity
Quarry City has no subsidiaries.
Supervision and Regulation
General
Quarry City is supervised and examined by the Missouri Division of Finance as the issuer of its
charter, and by the FDIC as the insurer of its deposits and its primary federal regulator. Quarry City also
is regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against
deposits and other matters. This system of state and federal regulation and supervision establishes a
comprehensive framework of activities in which an institution may engage and is intended primarily for
the protection of the FDIC’s deposit insurance fund and depositors, and not for the protection of security
holders. Quarry City is periodically examined by the Missouri Division of Finance and the FDIC to
evaluate its condition with respect to such matters as capital adequacy, assets, management, earnings,
liquidity, sensitivity to market interest rates and compliance with laws and regulations. Following
examinations, the Missouri Division of Finance and the FDIC prepare confidential reports for the
consideration of Quarry City’s board of directors on any operating deficiencies. Quarry City’s
relationship with its depositors also is regulated to a great extent by federal law and, to a much lesser
extent, state law, especially in matters concerning the ownership of deposit accounts and the form and
content of Quarry City’s loan documents.
Any change in these laws or regulations, whether by the FDIC, the Missouri Division of Finance,
the Federal Reserve Board, the Missouri legislature or Congress, could have a material adverse impact on
Quarry City and its operations.
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Set forth below is a brief description of certain regulatory requirements that are or will be
applicable to Quarry City. The description below is limited to certain material aspects of the statutes and
regulations addressed and is not intended to be a complete description of such statutes and regulations and
their effects on Quarry City.
Dodd-Frank Act
The Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank
Act”) significantly changed the bank regulatory structure and is affecting the lending, investment, trading
and operating activities of depository institutions. Pursuant to the Dodd-Frank Act, as of July 21, 2011,
the FDIC replaced the OTS as our primary federal regulator.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with expansive
powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau
has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.
The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and savings institutions with assets of
$10 billion or less, such as Quarry City, will continue to be examined by their applicable federal bank
regulators. The legislation also gives state attorneys general the ability to enforce applicable federal
consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now
based on the average consolidated total assets less tangible equity capital of a financial institution, rather
than on total deposits. The legislation also permanently increased the maximum amount of deposit
insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank
Act increased stockholder influence over boards of directors by requiring companies to give stockholders
a non-binding vote on executive compensation and so-called “golden parachute” payments.
Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or
require the issuance of implementing regulations. Their impact on our operations cannot yet fully be
assessed. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance
costs and interest expense for Quarry City.
Missouri Regulation
General. As a Missouri-chartered savings association, Quarry City derives its authority from the
provisions of the Missouri Savings and Loan Law and regulations of the Missouri Division of Finance.
The Director of the Missouri Division of Finance (“Director”) issues regulations which must then be
approved by the State Banking Board and Savings and Loan Board (“Board”). Missouri Law and the
resulting regulations are administered by the Director.
Investments and Accounts. Missouri law and regulations establish the authority for the
investments and loans that may be made by a Missouri-chartered savings association. Missouri law
authorizes the promulgation of regulations designed to make the powers of Missouri savings associations
comparable to those applicable to federal savings associations. The manner of establishing and
evidencing accounts is prescribed, as are the obligations of the institution with respect to withdrawals
from accounts and redemption of accounts. The Director may also impose or grant the same restrictions,
duties and powers concerning deposits that are applicable to federal institutions under federal rules and
regulations.
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Loans-to-One-Borrower Limitation. A state savings association may lend to a single or related
group of borrowers an amount up to 25% of its unimpaired capital and surplus. As of December 31,
2015, Quarry City’s largest lending relationship with a single or related group of borrowers totaled $1.8
million, which represented 20.3% of unimpaired capital and surplus. Therefore, Quarry City was in
compliance with the loans-to-one-borrower limitation.
Branch Offices. Under Missouri law, no institution may establish a branch office or agency
without the prior written approval of the Director. The Director reviews the proposed location, the
functions to be performed at the office, the estimated volume of business, the estimated annual expense of
the office and the mode of payments. Decisions of the Director may be appealed to the Board.
Merger or Consolidation. Missouri Law permits the merger or consolidation of savings
institutions, subject to the approval by the Director, when the Director finds that such merger or
consolidation is equitable to the account holders of the institutions and will not impair the usefulness and
success of other properly conducted institutions in the community. Stock institutions must obtain
shareholder approval pursuant to the Missouri statutes relating to general and business corporations.
Supervision. The Director has general supervisory authority over Missouri-chartered
institutions, including enforcement powers. Upon the Director’s finding that an institution is engaging in
an unsafe and unsound practice or violating laws, regulations or written conditions, the Director may
issue cease and desist orders. The Director also has authority to remove directors and officers under
certain circumstances. The Director may demand and take possession of the institution, if the institution
fails to comply with the Director’s orders, if the Director determines that the institution is insolvent, in an
unsafe condition or conducting business in an unsafe manner, or if the institution refuses to submit to
examination or inspection by the Division.
Federal Regulation
Capital Requirements. Under the FDIC’s regulations, federally insured, state-chartered savings
associations, such as Quarry City, are required to comply with minimum regulation capital requirements.
For an institution determined by the FDIC not to be anticipating or experiencing significant growth and to
be, in general, a strong banking organization rated composite 1 under Uniform Financial Institutions
Ranking System established by the Federal Financial Institutions Examination Council, the minimum
capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions,
the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common
stockholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and
credit card relationships) and certain other specified items.
In addition, FDIC regulations require state non-member banks to maintain certain ratios of
regulatory capital to risk-weighted assets, or “risk-based capital ratios.” Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to risk-weighting categories ranging
from 0.0% to 100.0%. State non-member banks must maintain a minimum ratio of total capital to riskweighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of
Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital
instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2
capital cannot exceed the amount of the institution’s Tier 1 capital.
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In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will
revise their leverage and risk-based capital requirements and the method for calculating risk-weighted
assets to make them consistent with agreements that were reached by the Basel Committee on Banking
Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a
new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the
minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and
assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual
status and to certain commercial real estate facilities that finance the acquisition, development or
construction of real property. The final rule also requires unrealized gains and losses on certain
“available-for-sale” securities holdings to be included for purposes of calculating regulatory capital
requirements unless a one-time opt-out is exercised. The rule limits a banking organization’s capital
distributions and certain discretionary bonus payments to executive officers if the banking organization
does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to riskweighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
The final rule also implements the Dodd-Frank Act’s directive to apply to savings and loan holding
companies consolidated capital requirements that are not less stringent than those applicable to their
subsidiary institutions. The final rule is effective January 1, 2015. The “capital conservation buffer” will
be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be
effective.
Prompt Corrective Action. Under the federal Prompt Corrective Action statute, the FDIC is
required to take supervisory actions against undercapitalized institutions under its jurisdiction, the
severity of which depends upon the institution’s level of capital. A savings association that has total riskbased capital of less than 8% or a leverage ratio or a Tier 1 risk-based capital ratio that generally is less
than 4% is considered to be undercapitalized. A savings association that has total risk-based capital less
than 6%, a Tier 1 core risk-based capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be “significantly undercapitalized.” A savings association that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”
Generally a receiver or conservator must be appointed within specific time frames for a savings
association that is “critically undercapitalized.” The regulations also provide that a capital restoration
plan must be filed with the FDIC within 45 days of the date a savings institution receives notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Various restrictions,
such as on capital distributions and growth, also apply to “undercapitalized” institutions. The FDIC may
also take any number of discretionary supervisory actions against undercapitalized institutions, including
the issuance of a capital directive and the replacement of senior executive officers and directors.
The new rules discussed under “Capital Requirements” that will increase regulatory capital
requirements will adjust the prompt corrective action categories accordingly.
At December 31, 2015, Quarry City met the criteria for being considered “well capitalized.”
Activities and Investments of Insured State-Chartered Savings Associations. When a
savings association establishes or acquires a subsidiary or elects to conduct any new activity through a
subsidiary that the association controls, the savings association must notify the FDIC at least 30 days in
advance and provide the required information in connection with such notification. Savings associations
must also conduct the activities of subsidiaries in accordance with applicable regulations and orders.
The FDIC may determine that the continuation by a savings association of its ownership control
of, or its relationship to, the subsidiary constitutes a serious risk to the safety and soundness or stability of
24
the savings association or is inconsistent with sound banking practices or the purposes of the Federal
Deposit Insurance Act. Based upon that determination, the FDIC has the authority to order the savings
association to divest control of the subsidiary. The FDIC also may determine by regulation or order that
any specific activity poses a serious threat to the deposit insurance fund. If so, it may require that no
insured institution engage in that activity.
Qualified Thrift Lender Test. We are required to satisfy a qualified thrift lender (“QTL”) test,
under which we must either qualify as a “domestic building and loan association” as defined in the
Internal Revenue Code or maintain at least 65% of our “portfolio assets” in “qualified thrift investments.”
“Qualified thrift investments” consist primarily of residential mortgages and related investments,
including certain mortgage-backed and related securities. “Portfolio assets” generally means total assets
less specified liquid assets up to 20% of total assets, goodwill and other intangible assets and the value of
property used to conduct business. A savings association that fails the qualified thrift lender test must
operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL Test
potentially subject to agency enforcement action for violation of law. At December 31, 2015, we
maintained approximately 102% of our portfolio assets in qualified thrift investments and, therefore, we
satisfied the QTL test.
Capital Distributions. Federal regulations require prior FDIC approval of capital distributions
by state savings associations if (i) the total of all distributions made (including the proposed distribution)
in any calendar year will exceed a savings association’s retained net income for the current year and the
immediately preceding two years, (ii) the association would not be “well capitalized” following the
distribution, (iii) the distribution would otherwise violate an applicable regulatory prohibition or (iv) the
institution’s examination and compliance ratings make it ineligible for expedited treatment of its
applications.
In addition, a savings association may not pay any dividend if the payment of the dividend would
cause it to become “undercapitalized” or if the institution is already “undercapitalized.” The regulators
have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate
level would be an unsafe banking practice. Moreover, regulatory policy statements have been issued
providing that insured depository institutions should generally pay dividends only from current operating
earnings.
Community Reinvestment Act and Fair Lending Laws. Under the Community Reinvestment
Act of 1977 (“CRA”), the FDIC is required to assess the record of all financial institutions regulated by it
to determine if such institutions are meeting the credit needs of the community (including low and
moderate income neighborhoods) which they serve. CRA performance evaluations are based on a fourtiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA
performance evaluations are considered in evaluating applications for such things as mergers, acquisitions
and applications to open branches. Quarry City’s most recent CRA rating was “Satisfactory.”
Transactions with Insiders. Federal law generally prohibits loans by a company to its executive
officers and directors. However, the law contains a specific exception for loans by a depository institution
to its executive officers and directors in compliance with federal banking laws, assuming such loans are
also permitted under the law of the institution’s chartering state. Under such laws, Quarry City’s
authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as
entities under such person’s control, is limited. The law limits both the individual and aggregate amount
of loans Quarry City may make to insiders based, in part, on the Quarry City’s capital position. Certain
Board approval procedures must be followed. Such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and not involve more than the normal risk of
25
repayment. There is an exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give preference to insiders over other
employees. Loans to executive officers are further limited to specific categories.
Standards for Safety and Soundness. Federal law requires each federal banking agency to
prescribe certain standards for all insured depository institutions. These standards relate to, among other
things, internal controls, information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as
the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured depository institutions before
capital becomes impaired. Upon a determination by the appropriate federal banking agency that an
institution fails to meet any standard prescribed by the guidelines, the agency may require the institution
to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the institution to implement
an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action,
including the issuance of a cease and desist order or the imposition of civil money penalties.
Insurance of Deposit Accounts. Quarry City is a member of the Deposit Insurance Fund, which
is administered by the FDIC. Deposit accounts in Quarry City are insured up to a maximum of $250,000
for each separately insured depositor.
The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the
FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment
rate depends upon the category to which it is assigned and certain adjustments specified by FDIC
regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible
adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible
capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate
more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s
current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the
assessment on an institution’s volume of deposits.
In addition to the FDIC assessments, the Financing Corporation is authorized to impose and
collect, through the FDIC, assessments for anticipated payments, issuance costs and custodial fees on
bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and
Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017
through 2019. For the quarter ended December 31, 2015, the annualized Financing Corporation
assessment was equal to 0.62 basis points of total assets less tangible capital.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of
estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the
1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed
to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to
the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-term fund
ratio of 2%.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any
significant increases would have an adverse effect on the operating expenses and results of operations of
Quarry City. Management cannot predict what assessment rates will be in the future.
26
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of
Quarry City does not know of any practice, condition or violation that may lead to termination of our
deposit.
Federal Home Loan Bank System. Quarry City is a member of the Federal Home Loan Bank
System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System
provides a central credit facility primarily for member institutions as well as other entities involved in
home mortgage lending. As a member of the Federal Home Loan Bank of Des Moines, Quarry City is
required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31,
2015, Quarry City was in compliance with this requirement.
Federal Reserve System. Quarry City is subject to reserve requirements established by the
Federal Reserve Board. Reserve requirements are the amount of funds that a depository institution must
hold in reserve against specific deposit liabilities, primarily transaction accounts. Depository institutions
must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. The reserve ratio is
established each year by the Federal Reserve Board. For 2015, the ratio is 3% of net transaction accounts
up to $79.5 million and 10% on amounts over $79.5 million. The first $12.4 million of net transaction
accounts has a reserve ratio of 0%.
Enforcement
The FDIC has primary federal enforcement responsibility over state savings associations,
including the authority to bring enforcement action against “institution-related parties,” including officers,
directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease and desist order to removal
of officers and/or directors of the institution, receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day,
unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per
day.
Qualified Mortgages and Retention of Credit Risk
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how
they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for
ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition
will be presumed to have complied with the new ability-to-repay standard. Under the Consumer
Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified
features, including:
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less
“bona fide discount points” for prime loans);
•
interest-only payments;
•
negative-amortization; and
•
terms longer than 30 years.
27
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may
not exceed 43%. Lenders must also verify and document the income and financial resources relied upon
to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule
and maximum interest rate during the first five years, taking into account all applicable taxes, insurance
and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit
our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more
expensive/and or time consuming to make these loans, which could limit our growth or profitability.
In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require
securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified
residential mortgage.” The regulatory agencies have issued a proposed rule to implement this
requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be
no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection
Bureau for purposes of its regulations (as described above). Although the final rule with respect to the
retention of credit risk has not yet been issued, the final rule could have a significant effect on the
secondary market for loans and the types of loans we originate, and restrict our ability to make loans.
Other Regulations
Interest and other charges collected or contracted for by Quarry City are subject to state usury
laws and federal laws concerning interest rates. Quarry City’s operations are also subject to federal laws
(and regulations issued thereunder) applicable to credit transactions, such as the:
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for
one- to four-family residential real estate receive various disclosures, including good faith
estimates of settlement costs, lender servicing and escrow account practices, and
prohibiting certain practices that increase the cost of settlement services;
•
Home Mortgage Disclosure Act, requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the community it serves;
•
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
•
Fair Credit Reporting Act, governing the use and provision of information to credit
reporting agencies;
•
Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
•
Truth in Savings Act.
The operations of Quarry City also are subject to the:
•
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records;
28
•
Electronic Funds Transfer Act, which governs automatic deposits to and withdrawals
from deposit accounts and customers’ rights and liabilities arising from the use of
automated teller machines and other electronic banking services;
•
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives
“substitute checks,” such as digital check images and copies made from that image, the
same legal standing as the original paper check;
•
The USA PATRIOT Act, which requires banks and savings institutions to, among other
things, establish broadened anti-money laundering compliance programs and due
diligence policies and controls to ensure the detection and reporting of money laundering.
Such required compliance programs are intended to supplement pre-existing compliance
requirements that apply to financial institutions under the Bank Secrecy Act and the
Office of Foreign Assets Control regulations; and
•
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer
financial information by financial institutions with unaffiliated third parties and requires
all financial institutions offering products or services to retail customers to provide such
customers with the financial institution’s privacy policy and allow such customers the
opportunity to “opt out” of the sharing of certain personal financial information with
unaffiliated third parties.
Change in Control
Under the Change in Bank Control Act, a notice must be submitted to the FDIC if any person
(including a company), or group acting in concert, seeks to acquire “control” of a state savings and loan
association. An acquisition of “control” is deemed to occur upon the acquisition of 25% or more of a
class of voting stock of a savings and loan association. An acquisition of “control” is presumed to occur,
subject to rebuttal, upon the acquisition of 10% or more of a class of voting stock under certain
circumstances, such as where the savings association has a class of securities registered under Section 12
of the Securities Exchange Act of 1934 or the acquirer would be the largest holder of any class of voting
stock of the association. Under the Change in Bank Control Act, the FDIC has 60 days from the filing of
a complete notice to approve or disapprove the proposed acquisition, taking into consideration such
factors as the financial resources of the acquirer, the competence, experience or integrity of the acquirer
or any proposed management personnel for the association, any potential adverse effects on the deposit
insurance fund and competitive considerations. Any company that acquires control would be subject to
regulation as a savings and loan holding company.
Federal Securities Laws
Our common stock is registered with the FDIC under the Securities Exchange Act of 1934. We
are subject to the information, proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934 as implemented by the FDIC.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012,
has made numerous changes to the federal securities laws to facilitate access to capital markets. Under
the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most
29
recently completed fiscal year qualifies as an “emerging growth company.” Quarry City qualifies as an
emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual
executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation
payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes).
An emerging growth company also is not subject to the requirement that its auditors attest to the
effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure
regarding executive compensation; however, Quarry City will also not be subject to the auditor attestation
requirement or additional executive compensation disclosure so long as it remains a “smaller reporting
company” under Securities and Exchange Commission regulations (generally less than $75 million of
voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to
comply with new or amended accounting pronouncements in the same manner as a private company, but
must make such election when the company is first required to file a registration statement. Such an
election is irrevocable during the period a company is an emerging growth company. Quarry City has
elected to comply with new or amended accounting pronouncements in the same manner as a private
company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal
year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last
day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common
equity securities of the company pursuant to an effective registration statement under the Securities Act of
1933; (iii) the date on which such company has, during the previous three-year period, issued more than
$1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large
accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million
of voting and non-voting equity held by non-affiliates).
Taxation
Federal Taxation
General. Quarry City is subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize material federal income tax matters and is not a comprehensive description of
the tax rules applicable to Quarry City.
Method of Accounting. For federal income tax purposes, Quarry City will report its income and
expenses on the cash basis method of accounting and use a calendar year ending December 31st for filing
its federal income tax returns.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative
minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to
as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent
alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in
general, offset no more than 90% of alternative minimum taxable income. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities in future years. At
December 31, 2015, Quarry City had no alternative minimum tax credit carryforward.
30
Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating
losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December
31, 2015, Quarry City had no net operating loss carryforward for federal income tax purposes.
Audit of Tax Returns. Quarry City’s federal income tax returns have not been audited in the
most recent five-year period.
State Taxation
Missouri-based thrift institutions, such as Quarry City, are subject to a special financial
institutions tax, based on net income without regard to net operating loss carry-forwards, at the rate of 7%
of net income. This tax is in lieu of certain other state taxes on thrift institutions, on their property, capital
or income, except taxes on tangible personal property owned by Quarry City and held for lease or rental
to others and on real estate, contributions paid pursuant to the Unemployment Compensation Law of
Missouri, social security taxes, sales taxes and use taxes. In addition, Quarry City is entitled to credit
against this tax against all taxes paid to the State of Missouri or any political subdivision except taxes on
tangible personal property owned by Quarry City and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri, social security taxes,
sales and use taxes, and taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift
institutions are not subject to the regular state corporate income tax.
There have not been any audits of Quarry City’s state income tax returns during the past five
years.
For additional information regarding taxation, see Note 8 of the Notes to Quarry City’s Financial
Statements beginning on page F-1 of this annual report.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K, including the financial statements, is available without charge
to any individual requesting a copy, by writing to Quarry City, P.O. Box 7, Warrensburg, Missouri 64093,
Attention: Corporate Secretary.
ITEM 1A.
Risk Factors
The presentation of Risk Factors is not required for smaller reporting companies such as Quarry
City.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We operate from our office located at 713 PCA Road, Warrensburg, Missouri 64093. Our
premises are owned. The net book value of our premises, land and equipment was $1.3 million at
December 31, 2015.
ITEM 3.
Legal Proceedings
31
At December 31, 2015, we were not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts
which management believes will not materially adversely affect our financial condition, our results of
operations and our cash flows.
ITEM 4.
Mine Safety Disclosures.
Not applicable.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
(a)
Market Information, Holders and Dividend Information. Our common stock is quoted
on the OTC Bulletin Board under the symbol “QRRY.” The approximate number of holders of record of
Quarry City’s common stock as of December 31, 2015 was 108. Certain shares of Quarry City are held in
“nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not
known or included in the foregoing number.
Quarry City does not currently pay cash dividends on its common stock. See “Item 1. Business –
Supervision and Regulation – Federal Banking Regulation – Capital Distributions.”
(b)
Sales of Unregistered Securities. Not applicable.
(c)
Use of Proceeds. Not applicable
(d)
Securities Authorized for Issuance Under Equity Compensation Plans. None.
(e)
Stock Repurchases. Not applicable.
(f)
Stock Performance Graph. Not required for smaller reporting companies.
ITEM 6.
Selected Financial Data
Not required for smaller reporting companies.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
This section is intended to help potential investors understand our financial performance through
a discussion of the factors affecting our financial condition at December 31, 2015 and December 31, 2014
and our results of operations for the years ended December 31, 2015 and 2014. This section should be
read in conjunction with the financial statements and notes to the financial statements that appear
elsewhere in this Annual Report on Form 10-K.
Overview
We have operated continuously in Warrensburg, Missouri, which is the County Seat of Johnson
County, located in west central Missouri, since our founding in 1890. Our business consists primarily of
accepting deposits from the general public and investing those deposits, together with funds generated
32
from operations and to a lesser extent borrowings, in one- to four-family residential real estate loans;
construction loans; commercial real estate, multi-family and land loans; agricultural real estate loans;
commercial and agricultural non-real estate loans; and to a lesser extent, consumer loans. We offer a
variety of deposit accounts, including passbook accounts, certificates of deposit, commercial and regular
checking accounts and individual retirement accounts. At December 31, 2015, we had total assets of
$51.0 million, net loans of $37.8 million, total deposits of $42.7 million, delete and stockholders’ equity
of $8.2 million.
Our results of operations depend primarily on our net interest income, which is the difference
between the interest income we earn on our loan portfolio and the interest expense we incur on our
deposits. Results of operations are also affected by our provision for loan losses, gain on sale of loans,
mortgage servicing fees, amortization of servicing asset, and other noninterest income. Our noninterest
expense consists of compensation and benefits expense, occupancy expense, equipment and data
processing expense, FDIC insurance premiums, professional and regulatory services, advertising and
other noninterest expense.
Our results of operations are also significantly affected by general economic and competitive
conditions, as well as changes in interest rates, government policies and actions of regulatory authorities.
Future changes in applicable laws, regulations or government policies may materially affect our financial
condition and results of operations.
We have experienced significant growth in recent years. In 2009, in connection with our decision
to grow our franchise, we moved our office to our current location which includes a drive-through facility
and provides us additional office and retail banking space. At that time we also introduced checking
accounts to expand our product offerings, and believe that we have been able to attract and retain more
customers as a result of our newer facility and expanded product offerings. Also, in April 2009 we added
an additional commercial and agricultural loan officer, and our net loans increased $8.2 million, or 46.1%,
to $26.0 million at December 31, 2009 from $17.8 million at December 31, 2008. Finally, in 2009, as a
result of the continuing low interest rate environment, consistent with our interest rate risk strategy, we
hired an experienced loan officer with secondary market experience to oversee our mortgage banking
operations, and we increased the sales of our conforming, fixed-rate one-to four-family residential real
estate loans with terms of 15 years or greater with servicing retained, thereby increasing our non-interest
income. Net loans increased further to $34.4 million at December 31, 2010.
In May 2011, we entered into a Memorandum of Understanding (“MOU”) with the Office of
Thrift Supervision (“OTS”), our then primary federal regulator, to address certain weaknesses in our
credit administration and underwriting policies and procedures. In addition to these other conditions, the
MOU restricted our ability to grow, and management determined, in view of the ongoing low interest rate
environment, to shrink our balance sheet by reducing our net loans, which decreased to $27.6 million at
December 31, 2011, and to $26.6 million at December 31, 2012. The MOU was terminated in February
2012.
In July 2013, the Association completed its conversion from a mutual to stock institution and
invested the proceeds from the sale of common stock, along with existing cash equivalents primarily in
one- to four-family residential, construction, commercial real estate and multi-family loans.
Business Strategy
33
Our current business strategy is to operate as a well-capitalized and profitable community bank
dedicated to serving the needs of our consumer and business customers, and offering personalized and
efficient customer service. Highlights of our current business strategy include:
•
remaining a community-oriented financial institution with a continued emphasis on
retail and small businesses customers in our market area. We were chartered in 1890
and have operated continuously in Warrensburg, Missouri since that date. Our President
and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer have been employed with Quarry City since 1971 and 1975, respectively. We are
committed to meeting the financial needs of the individuals and small businesses in the
communities we serve, and we are dedicated to providing quality personal service to our
customers.
•
increasing commercial, multi-family, agricultural and land loans while maintaining
our conservative loan underwriting. While we will continue to emphasize the origination
of one-to four-family residential real estate loans, we also intend, subject to market
conditions, to continue to originate commercial real estate, multi-family and land loans,
agricultural real estate loans and agricultural and commercial non-real estate loans in
order to increase the yield and interest rate sensitivity of our total loan portfolio.
•
managing interest rate risk, including pursuing our strategy of selling conforming
fixed-rate, one- to four-family residential real estate loans with terms of 15 years and
greater, while attempting to maximize, to the extent practicable, our net interest
margin. During the last several years, we have taken steps that are intended to increase
our net interest margin as well as our ability to manage our interest rate risk. In
particular, we have retained in our portfolio commercial real estate, multi-family and land
loans, as well as agricultural and commercial non-real estate loans, all of which generally
have shorter terms to maturity and higher yields than fixed-rate, one- to four-family
residential and agricultural real estate loans. Additionally, we have sold a substantial
portion of our conforming fixed-rate, one- to four-family residential real estate loans with
terms of 15 years and greater. Finally, we have invested a significant amount of our
assets in short-term instruments, including cash and cash equivalents.
•
continuing to attract and retain customers by offering more products, including
checking accounts and debit cards, and a greater variety of loan products. In an effort
to grow our banking franchise, in 2009 we introduced checking accounts, enhanced our
direct marketing efforts to local businesses, and established a stronger culture of crossselling our products to existing customers. At this time we also increased our emphasis
on our mortgage banking operation which increased our one- to four-family residential
real estate loan offerings. Additionally we have introduced debit cards, and we believe
that our new office location provides greater visibility to allow us to grow our franchise.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or
discretion or make significant assumptions that have, or could have, a material impact on the carrying
value of certain assets or on income, to be critical accounting policies. We consider the following to be
our critical accounting policies.
Allowance for Loan Losses. We believe that the allowance for loan losses and related provision
for loan losses are particularly susceptible to change in the near term, due to changes in credit quality
which are evidenced by trends in charge-offs and in the volume and severity of past due loans.
34
The allowance for loan losses is maintained at a level to cover probable credit losses inherent in
the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan
losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for
loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories
of loans:
•
loans that we evaluate individually for impairment under Accounting Standards Codification
(“ASC”) 310-10, “Receivables;” and
•
groups of loans with similar risk characteristics that we evaluate collectively for impairment
under ASC 450-20, “Loss Contingencies.”
The allowance for loan losses is evaluated on a regular basis by management and reflects
consideration of all significant factors that affect the collectability of the loan portfolio. The factors used
to evaluate the collectability of the loan portfolio include, but are not limited to, current economic
conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial
strength of the borrower, and estimated value of any underlying collateral. This evaluation is inherently
subjective as it requires estimates that are subject to significant revision as more information becomes
available. Actual loan losses may be significantly more than the allowance for loan losses we have
established which could have a material negative effect on our financial results. See also “Business Allowance for Loan Losses.”
The recently enacted JOBS Act contains provisions that, among other things, reduce certain
reporting requirements for qualifying public companies. As an “emerging growth company” we may
delay adoption of new or revised accounting pronouncements applicable to public companies until such
pronouncements are made applicable to private companies. If we choose to take advantage of the benefits
of this extended transition period, our financial statements may not be comparable to companies that
comply with such new or revised accounting standards.
35
Comparison of Financial Condition at December 31, 2015 and December 31, 2014
Summary of Selected Balance Sheet Data
December 31,
2015
Total assets
Cash and cash equivalents
$
December 31,
2014
51,020,667 $
10,955,771
49,054,801 $
7,702,148
Increase
(Decrease)
1,965,866
3,253,623
% Change
4.0 %
42.2
Stock in Federal Home Loan Bank ("FHLB")
of Des Moines
58,900
91,600
(32,700)
(35.7)
Loans held for sale
451,029
656,510
(205,481)
(31.3)
37,761,046
38,751,449
(990,403)
(2.6)
1,299,669
1,330,113
(30,444)
(2.3)
494,252
522,981
(28,729)
(5.5)
42,693,263
39,890,263
2,803,000
-
1,000,000
(1,000,000)
8,217,844
8,005,438
Loans receivable, net
Premises and equipment
Other assets (1)
Deposits
Advances from FHLB of Des Moines
Stockholders' equity
212,406
7.0
(100.0)
2.7
(1) Includes accrued interest receivable, servicing asset and other assets.
Total assets increased by $2.0 million, or 4.0%, to $51.0 million at December 31, 2015 from
$49.1 million at December 31, 2014. The increase in total assets was due primarily to an increase in cash
and cash equivalents, partially offset by a decrease in loans.
Net loans, excluding loans held for sale, decreased $990,000, or 2.6%, to $37.8 million at
December 31, 2015 from $38.8 million at December 31, 2014, due primarily to the principal repayments
exceeding the origination of loans. Commercial, multi-family and land loans decreased by $1.1 million,
or 9.9%, to $10.4 million at December 31, 2015 from $11.5 million at December 31, 2014. This decrease
was due primarily to the payoff of one commercial real estate loan.
Loans held for sale decreased $206,000, or 31.3%, to $451,000 at December 31, 2015 from
$657,000 at December 31, 2014 as a result of the timing of loan sales.
Cash and cash equivalents increased $3.3 million, or 42.2%, to $11.0 million at December 31,
2015 from $7.7 million at December 31, 2014. The increase was due primarily to new customer deposits
and, to a lesser degree, repayments in loans, partially offset by the repayment of the $1.0 million advance
from FHLB.
Deposits increased $2.8 million, or 7.0%, to $42.7 million at December 31, 2015 from $39.9
million at December 31, 2014. Transaction accounts, consisting of non-interest bearing checking,
interest-bearing checking and passbook accounts increased $1.4 million, or 8.1%, to $19.6 million at
December 31, 2015 from $18.2 million at December 31, 2014. Certificate accounts increased $1.4
million, or 6.1%, to $23.1 million at December 31, 2015 from $21.7 million at December 31, 2014.
Stockholders’ equity increased to $8.2 million at December 31, 2015 from $8.0 million at
December 31, 2014 as a result of net earnings of $212,000 for the year ended December 31, 2015.
36
Comparison of Operating Results for the Years Ended December 31, 2015 and 2014
Summary of Net Interest Income
2015
Interest income:
Loans receivable
Securities
Other interest - earning assets
Total interest income
$
Interest expense:
Checking accounts
Passbook accounts
Certificates of deposit
Total deposits
Advances from FHLB
Total interest expense
Net interest income
$
Increase
(Decrease)
2014
2,096,031 $
1,316
15,617
2,112,964
2,043,014 $
610
8,985
2,052,609
53,017
706
6,632
60,355
30,696
16,763
247,641
295,100
1,583
296,683
28,969
15,768
221,406
266,143
1,480
267,623
1,727
995
26,235
28,957
103
29,060
1,816,281 $
1,784,986 $
31,295
% Change
2.6 %
115.7
73.8
2.9
6.0
6.3
11.8
10.9
7.0
10.9
1.8 %
Summary of Average Yields, Average Rates and Average Balances
Average Yields and Rates
2015
Increase
2014
(decrease)
Loans receivable
Securities
5.21 %
1.67
5.33 %
0.84
(0.12) %
0.83
0.18
0.16
0.02
Total interest-earning assets
4.32
4.66
(0.34)
Checking accounts
0.29
0.29
0.00
Passbook accounts
0.25
1.09
0.25
1.13
0.00
(0.04)
0.74
0.29
0.74
0.27
0.00
0.02
0.73
0.73
0.00
Total deposits
Borrowings
Total interest-bearing liabilities
Net interest rate spread
3.59
3.93
(0.34)
Net interest margin
3.72 %
4.05 %
(0.33) %
37
Average Balances
2015
Loans receivable
Securities
$
Increase
2014
(Decrease)
% Change
40,266,580 $
78,754
8,535,854
38,351,806 $
72,562
5,630,242
1,914,774
6,192
2,905,612
5.0 %
8.5
51.6
48,881,188
44,054,610
4,826,578
11.0
Checking accounts
10,686,297
10,054,952
631,345
6.3
Passbook accounts
Total deposits
6,652,758
22,711,679
40,050,734
6,273,207
19,559,381
35,887,540
379,551
3,152,298
4,163,194
6.1
16.1
11.6
538,462
538,462
-
-
40,589,196
36,426,002
4,163,194
11.4
Total interest-earning assets
Borrowings
Total interest-bearing liabilities
Net interest-earning assets
$
8,291,992 $
7,628,608 $
663,384
8.7 %
Summary of Noninterest Income
2015
Noninterest income:
Gain on sale of loans
Mortgage servicing fee income
$
$
% Change
244,786 $
80,862
247,953 $
79,148
(3,167)
1,714
(1.3) %
2.2
(67,228)
28,163
(59,352)
23,495
(7,876)
4,668
13.3
19.9
286,583 $
291,244 $
(4,661)
(1.6) %
Amortization of servicing asset
Other
Total noninterest income
Increase
(Decrease)
2014
Summary of Noninterest Expense
2015
2014
Increase
(Decrease)
% Change
Noninterest expense:
Compensation and benefits
Occupancy expense
$
1,114,982 $
77,935
1,089,231 $
73,573
25,751
4,362
2.4 %
5.9
Equipment and data processing expense
FDIC insurance premium expense
Professional and regulatory services
187,089
27,848
152,352
176,975
26,294
122,027
10,114
1,554
30,325
5.7
5.9
24.9
Advertising
Other
66,583
122,066
49,253
117,883
17,330
4,183
35.2
3.5
Total noninterest expense
$
1,748,855 $
1,655,236 $
93,619
5.7 %
General. Net earnings decreased $52,000, or 19.5%, to $212,000 for 2015 from $264,000 for
2014 as higher noninterest expense and lower noninterest income more than offset higher net interest
income.
38
Interest Income. Interest income increased as a result of an increase of $4.8 million in the
average balance of interest-earning assets to $48.9 million for 2015 from $44.1 million for 2014 but was
slightly offset by a decrease in the average yield earned on interest-earning assets, which decreased 34
basis points to 4.32% for 2015 from 4.66% for 2014.
Interest Expense. Interest expense increased $29,000 to $297,000 for 2015 from $268,000 for
2014. The increase was due to an increase in the average balance of deposits to $40.1 million for 2015
from $35.9 million for 2014.
Net Interest Income. Net interest income increased $31,000 to $1.8 million for the year ended
December 31, 2015 from $1.8 million for the year ended December 31, 2014. Net interest income
increased due to a higher level of net interest-earning assets. The net interest-earning assets increased to
$8.3 million for 2015 from $7.6 million for 2014. Our net interest margin decreased 33 basis points to
3.72% for 2015 from 4.05% for 2014.
Our net interest rate spread decreased to 3.59% for 2015 from 3.93% for 2014. The net interest
rate spread decreased as the average yield on interest-earning assets decreased 34 basis points and the
average cost of interest- bearing liabilities remained the same.
Provision for Loan Losses. There was no provision for loan losses for the years ended December
31, 2015 and 2014.
The allowance for loan losses was $486,000 and $486,000, or 1.15% and 1.14% of total loans, at
December 31, 2015 and 2014, respectively.
At December 31, 2015, the unallocated allowance for loan losses was $142,000. The Association
increased the unallocated allowance for loan losses during 2015 due to uncertainties that could affect
management’s estimate of probable losses. The unallocated component of the allowance reflects the
imprecision inherent in the underlying assumptions used in the methodologies for estimating the general
component of the allowance. Management believes that all known and inherent losses in the loan
portfolio that are probable and reasonable to estimate have been recorded at each balance sheet date.
Nonperforming loans, consisting of nonaccrual loans, decreased to $281,000 at December 31,
2015 from $638,000 at December 31, 2014. The decrease was due to the payoff of three commercial real
estate loans. Nonperforming loans are evaluated to determine impairment. The allowance for loan losses
as a percentage of nonperforming loans at December 31, 2015 and 2014 was 172.55% and 76.09%,
respectively. Net (recoveries) charge-offs to average loans outstanding were 0.00% for 2015, compared
to (0.18)% for 2014.
Noninterest Income. Noninterest income decreased $5,000 during 2015 due primarily to modest
changes in gain on sale of loans, amortization of servicing asset and other noninterest income which is
primarily transaction account fee income. Gain on sale of loans decreased slightly which was $245,000
for the year ended December 31, 2015, compared to $248,000 for the year ended December 31, 2014.
Servicing fee income for the year ended December 31, 2015 was $81,000 compared to $79,000 for the
year ended December 31, 2014. Amortization of servicing asset is impacted by repayments of sold loans
that we have retained servicing rights. Amortization was $67,000 for 2015, compared to $59,000 for
2014. These decreases in noninterest income were offset by an increase in other noninterest income of
$5,000 for the year.
39
Noninterest Expense. Noninterest expense increased $94,000 to $1.7 million for 2015 from $1.6
million for 2014 resulting primarily from an increase in professional and regulatory services, and to a
lesser extent, higher compensation and benefits expense, advertising expense, and equipment and data
processing expense.
Professional and regulatory services increased due to higher professional fees related to the
Association operating as a public company. Compensation and benefits increased due to higher salary
levels and health insurance costs as a result of a greater number of covered employees. Advertising
increased as a result of additional marketing campaigns to attract new customers. Equipment and data
processing expense increased due to older equipment upgrades.
Income Tax Expense. The provision for income taxes was $142,000 for the year ended
December 31, 2015, compared to $157,000 for the year ended December 31, 2014, reflecting a decrease
in pretax income for 2015.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other
information for the periods indicated. All average balances are monthly average balances. Management
does not believe that the use of month-end balances instead of daily average balances has caused any
material differences in the information presented. Nonaccrual loans were included in the computation of
average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth
below include the effect of net deferred costs and discounts that are accreted to interest income.
40
At December 31,
2014
For the Years Ended December 31,
2014
Average
Outstanding
Balance
Yield/Rate
Interest-earning assets:
Loans..........................................................
Stock in FHLB of Des Moines ..................
Other interest-earning assets......................
Total interest-earning assets ....................
Noninterest-earning assets .........................
Total assets ...............................................
Interest-bearing liabilities:
Checking accounts .....................................
Passbook accounts .....................................
Certificates of deposit ................................
Total deposits ...........................................
Advances from FHLB of Des Moines.......
Total interest-bearing liabilities ...............
Noninterest-bearing checking accounts ....
Noninterest-bearing liabilities ...................
Equity .........................................................
Total liabilities and equity .........................
Net interest income ....................................
Net interest rate spread (1) ..........................
Net interest-earning assets (2) .....................
Net interest margin (3) ................................
Average interest-earning assets to
interest-bearing liabilities ......................
(1)
(2)
(3)
5.13%
0.50
0.22
4.27
$
$
0.29
0.25
1.08
0.73
$
0.73
$
Interest
40,266580
78,754
8,535,854
48,881,188
1,856,212
50,737,400
$ 2,096,031
1,316
15,617
2,112,964
10,686,297
6,652,758
22,711,679
40,050,734
538,462
40,589,196
1,840,657
192,299
8,115,248
50,737,400
30,696
16,762
247,641
295,100
1,584
296,683
2013
Average
Outstanding
Balance
Yield/Rate
5.21%
1.67
0.18
4.32
$
$
0.29
0.25
1.09
0.74
0.29
0.73
$
$
38,351,806
72,562
5,630,242
44,054,610
1,648,398
45,703,008
$ 2,043,014
610
8,985
2,052,609
10,054,952
6,273,207
19,559,381
35,887,540
538,462
36,426,002
1,212,900
209,284
7,854,822
45,703,008
28,969
15,768
221,406
266,143
1,480
267,623
$ 1,816,281
3.54%
Interest
8,291,992
7,628,608
3.72%
4.05%
120.43%
120.94%
Net interest spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing
liabilities.
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
Net interest margin represents net interest income divided by average total interest-earning assets.
41
0.29
0.25
1.13
0.74
0.27
0.73
3.93%
$
120.80%
5.33%
0.84
0.16
4.66
$ 1,784,986
3.60%
$
Yield/Rate
Rate/Volume Analysis:
The following table presents the effects of changing rates and volumes on our net interest income
for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in
rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The total column represents the sum of the prior columns.
For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have
been allocated to the changes due to volume and the changes due to rate in proportion to the relationship
of the absolute dollar amounts of change in each.
For the Years Ended December 31,
2015 vs. 2014
Total
Increase (Decrease) Due to
Increase
Volume
Rate
(Decrease)
Interest-earning assets:
Loans receivable ....................................
Stock in FHLB of Des Moines ..............
Other interest-earning assets..................
$
100,402
56
5,166
$
(47,385)
650
1,466
$
53,017
706
6,632
Total interest-earning assets ..............
105,624
(45,269)
60,355
Interest-bearing liabilities:
Checking accounts .................................
Passbook accounts .................................
Certificates of deposit ............................
Total deposits ....................................
Advances from FHLB of Des Moines~
Total interest-bearing liabilities ........
1,814
956
34,615
37,385
—
37,385
(87)
39
(8,380)
(8,428)
103
(8,325)
1,727
995
26,235
28,957
103
29,060
Change in net interest income ...............
$
68,239
$
(36,944)
$
31,295
Management of Market Risk
General. Because the majority of our assets and liabilities are sensitive to changes in interest
rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in
interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our
interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk
and limit the exposure of our net interest income to changes in market interest rates. Our board of
directors is responsible for evaluating the interest rate risk inherent in our assets and liabilities,
determining the level of risk that is appropriate given our business strategy, operating environment,
capital, liquidity and performance objectives, and for managing this risk consistent with policy guidelines.
Our interest rate sensitivity is monitored through the use of a net interest income simulation
model that generates estimates of the change in our net portfolio value over a range of interest rate
scenarios. The modeling assumes loan prepayment rates, reinvestment rates and deposit decay rates based
on historical experience and current economic conditions.
We have sought to manage our interest rate risk in order to control the exposure of our earnings
and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently
use the following strategies to manage our interest rate risk by:
(i)
selling a substantial portion of the conforming, fixed-rate, one- to four-family residential
real estate loans with terms of 15 years or more that we originate;
42
(ii)
lengthening the weighted average maturity of our liabilities through retail deposit pricing
strategies;
(iii)
investing in short-term instruments, including certificates of deposit and cash and cash
equivalents;
(iv)
originating commercial, multi-family, agricultural and land loans which tend to have
shorter terms and higher interest rates than one- to four-family residential real estate
loans, and which generate customer relationships that can result in larger noninterestbearing demand deposit accounts; and
(v)
maintaining adequate levels of capital.
Economic Value of Equity. The Federal Deposit Insurance Corporation requires the computation
of amounts by which the net present value of an institution’s cash flow from assets, liabilities and offbalance sheet items (the institution’s economic value of equity or “EVE”) would change in the event of a
range of assumed changes in market interest rates. We measure our interest rate risk and potential change
in our EVE through the use of a financial model provided by an outside consulting firm. This model uses
a discounted cash flow analysis and an option-based pricing approach to measure the interest rate
sensitivity of economic value of equity. Historically, the model estimated the economic value of each
type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury
yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point
increments. However, given the current low level of market interest rates, an EVE calculation for an
interest rate decrease of greater than 100 basis points has not been prepared. A basis point equals onehundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3%
to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column
below. The outside consulting firm provides us the results of the interest rate sensitivity model, which is
based on information we provide to the consulting firm to estimate the sensitivity of our economic value
of equity.
The table below sets forth, as of December 31, 2015, the calculation of the estimated changes in
our economic value of equity that would result from the designated immediate changes in the United
States Treasury yield curve.
Change in Interest
Rates (basis
points) (1)
+300
+200
+100
0
-100
(1)
(2)
(3)
(4)
Estimated Increase (Decrease)
in EVE
Estimated
EVE (2)
$
11,555
11,404
11,116
10,668
10,034
Amount
$
Percent
887
736
448
—
(634)
8.31%
6.90
4.20
—
(5.94)
EVE as a Percentage of Present
Value of Assets (3)
EVE Ratio (4)
22.64%
22.05
21.26
20.22
18.91
Increase
(Decrease)
(basis points)
242
183
104
—
(131)
Assumes an instantaneous uniform change in interest rates at all maturities.
EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
Present value of assets represents the discounted value of incoming cash flows on interest-earning assets.
EVE ratio represents EVE divided by the present value of assets.
Computations of prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and
43
should not be relied upon as indicative of actual results. The financial model of the outside consulting
firm illustrates the change in the economic value of our assets and liabilities at December 31, 2015
assuming an immediate change in interest rates. The table above indicates that at December 31, 2015, in
the event of a 200 basis point increase in interest rates, we would experience a 6.90% increase in our
economic value of equity. In the event of a 100 basis point decrease in interest rates, we would
experience a 5.94% decrease in our economic value of equity.
Certain shortcomings are inherent in the methodologies used in determining interest rate risk
through changes in economic value of equity. Modeling changes require making certain assumptions that
may or may not reflect the manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the economic value of equity information presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the
period being measured and assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly,
although interest rate risk calculations provide an indication of our interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on our net interest income and will differ from actual results.
Liquidity and Capital Resources
We maintain liquid assets at levels considered adequate to meet liquidity needs. Liquidity is the
ability to meet current and future financial obligations of a short-term nature. Our primary sources of
funds consist of deposit inflows, loan sales and repayments, and to a lesser extent, advances from the
Federal Home Loan Bank of Des Moines. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. Our board of directors is responsible for establishing
and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for
meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated
contingencies.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits
and securities; and (iv) the objectives of our asset/liability program. Excess liquid assets are invested
generally in interest-earning deposits.
Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by
our operating, financing, lending and investing activities during any given period. At December 31, 2015,
cash and cash equivalents totaled $11.0 million. We held no securities, other than Federal Home Loan
Bank stock, at December 31, 2015.
Our cash flows are derived from operating activities, investing activities and financing activities
as reported in our Statements of Cash Flows included in our financial statements.
At December 31, 2015, we had $5.2 million in loan commitments outstanding and loans in
process, and $2.2 million in unused lines of credit to borrowers. Certificates of deposit due within one
year of December 31, 2015 totaled $11.7 million, or 27.4%, of total deposits. If these deposits do not
remain with us, we will be required to seek other sources of funds, including loan sales and Federal Home
Loan Bank of Des Moines advances. Depending on market conditions, we may be required to pay higher
rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or
before December 31, 2016. We believe, however, that based on past experience, a significant portion of
44
such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the
interest rates offered.
Our primary investing activity is originating loans. During the years ended December 31, 2015
and 2014, we originated $27.9 million and $26.4 million of loans, respectively. The increase in loan
originations was due primarily to a $1.2 million increase in originations of one- to four-family residential
real estate loans originated for sale as a result of lower market interest rates in 2015.
Our primary source of funds is our deposit accounts. We had a net increase of $2.8 million and a
net increase of $4.8 million in total deposits during the years ended December 31, 2015 and 2014,
respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and deposit
products offered by us and our competitors, and by other factors. The $1.0 million FHLB advance held at
December 31, 2014 was repaid during 2015.
Liquidity management is both a daily and long-term function of business management. If we
require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal
Home Loan Bank of Des Moines, which provides an additional source of funds. At December 31, 2015,
based upon our pledged collateral, we had available credit with the FHLB of Des Moines of $4.2 million,
and we could increase this borrowing limit if we chose to increase our pledges.
We are subject to various regulatory capital requirements, including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a framework for calculating riskweighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At
December 31, 2015, we exceeded all regulatory capital requirements and were considered “well
capitalized” under regulatory guidelines. See Note 10 – Stockholders’ Equity and Regulatory Capital
Requirements of the notes to the financial statements.
The net proceeds from the stock offering increased our capital resources. Our financial condition
and results of operations was enhanced by the net proceeds from the stock offering, resulting in increased
net interest-earning assets and net interest income. However, due to the increase in equity resulting from
the net proceeds raised in the stock offering, our return on equity will be adversely affected.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial
instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit.
While these contractual obligations represent our future cash requirements, a significant portion of
commitments to extend credit may expire without being drawn upon. Such commitments are subject to
the same credit policies and approval process accorded to loans we make. For additional information, see
Note 11 – Commitments of the notes to the financial statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain
contractual obligations. Such obligations include operating leases for premises and equipment,
agreements with respect to borrowed funds and deposit liabilities.
45
Recent Accounting Pronouncements
The Association does not believe there are any recent accounting pronouncements that may have
a material impact on the financial statements or note disclosures. See Note 1 – Summary of Significant
Accounting Policies of the notes to the financial statements.
Impact of Inflation and Changing Price
Our financial statements and related notes have been prepared in accordance with U.S. GAAP.
U.S. GAAP generally requires the measurement of financial position and operating results in terms of
historical dollars without consideration of changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike
industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in
market interest rates have a greater impact on performance than the effects of inflation.
46
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
ITEM 8.
Financial Statements and Supplementary Data
Audited financial statements for Quarry City are included in this Annual report beginning on page
F-1.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
ITEM 9A
Controls and Procedures
(a)
An evaluation was performed under the supervision and with the participation of the
Association’s management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Association’s disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2015. Based on that evaluation, the Association’s management, including the Chief
Executive Officer and the Chief Financial Officer, concluded that the Association’s disclosure controls
and procedures were effective.
During the quarter ended December 31, 2015, there have been no changes in the Association’s
internal control over financial reporting that have materially affected, or are reasonably likely to
materially affect, the Association’s internal control over financial reporting.
(b)
Management’s annual report on internal control over financial reporting.
Management of the Association is responsible for establishing and maintaining adequate internal
control over financial reporting.
The Association’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. The Association’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Association; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures of the Association are being made only in accordance with authorizations of
management and directors of the Association; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the Association’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
47
the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management, including the principal executive officer and principal financial officer, assessed
the effectiveness of the Association’s internal control over financial reporting as of December 31, 2015,
based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in “Internal Control-Integrated Framework (2013).” Based on such assessment,
management believes that, as of December 31, 2015, the Association’s internal control over financial
reporting is effective, based on those criteria.
This annual report does not include an attestation report of the Association’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Association’s independent registered public accounting firm pursuant to
provisions of the Dodd-Frank Act that permit the Association to provide only management’s report in this
annual report.
ITEM 9B.
Other Information
None.
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
Code of Ethics
Quarry City has adopted a Code of Ethics that applies to Quarry City’s principal executive
officer, principal financial officer and all other employees and directors. The Code of Ethics is available
by writing Quarry City, P.O. Box 7, Warrensburg, Missouri, 64093, Attention Corporate Secretary.
Information concerning directors and executive officers of Quarry City is incorporated herein by
reference from the Proxy Statement, specifically the section captioned “Proposal I – Election of
Directors.”
ITEM 11.
Executive Compensation
Information concerning executive compensation is incorporated herein by reference from the
Proxy Statement, specifically the section captioned “Executive Compensation.”
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information concerning security ownership of certain owners and management is incorporated
herein by reference from the Proxy Statement, specifically the section captioned “Voting Securities and
Principal Holder Thereof.”
48
ITEM 13.
Certain Relationships and Related Transactions and Director Independence
Information concerning relationships, transactions and director independence is incorporated
herein by reference from the Proxy Statement, specifically the section captioned “Transactions with
Certain Related Persons” and “Board Independence.”
ITEM 14.
Principal Accountant Fees and Services
Information concerning principal accountant fees and services is incorporated herein by reference
from the Proxy Statement, specifically the section captioned “Proposal II-Ratification of Appointment of
Auditor.”
49
PART IV
ITEM 15.
(a)(1)
Exhibits and Financial Statement Schedules
Financial Statements
The documents filed as a part of this Form 10-K are:
(a)(2)
(A)
Report of Independent Registered Public Accounting Firm;
(B)
Balance Sheets as of December 31, 2015 and 2014;
(C)
Statements of Earnings for the years ended December 31, 2015 and 2014;
(D)
Statements of Stockholders’ Equity for the years ended December 31, 2015 and
2014;
(E)
Statements of Cash Flows for the years ended December 31, 2015 and 2014; and
(G)
Notes to Financial Statements.
Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or
has been included in the Notes to Financial Statements.
(a)(3)
Exhibits
3.1
3.2
4
10.1
21
31.1
31.2
32
*
Articles of Incorporation of Quarry City*
Bylaws of Quarry City *
Form of Common Stock Certificate of Quarry City.*
Form of Change in Control Agreements with Steve Andrew and David Andrew *
Subsidiaries
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Incorporated by reference to Application for Conversion on Form AC initially
filed with the FDIC on September 28, 2012.
50
EXHIBIT INDEX
3.1
3.2
4
10.1
21
31.1
31.2
32
*
Articles of Incorporation of Quarry City*
Bylaws of Quarry City *
Form of Common Stock Certificate of Quarry City.*
Form of Change in Control Agreements with Steve Andrew and David Andrew *
Subsidiaries
2002.
2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Incorporated by reference to Application for Conversion on Form AC initially filed with
the FDIC on September 28, 2012.
52
INDEX TO FINANCIAL STATEMENTS OF
QUARRY CITY SAVINGS AND LOAN ASSOCIATION
Report of Independent Registered Public Accounting Firm.............................................................................F-2
Balance Sheets at December 31, 2015 and 2014 ..............................................................................................F-3
Statements of Earnings for the Years ended December 31, 2015 and 2014.....................................................F-4
Statements of Stockholders’ Equity for the Years ended December 31, 2015 and 2014 .................................F-5
Statements of Cash Flows for the Years ended December 31, 2015 and 2014 ................................................F-6
Notes to Financial Statements ..........................................................................................................................F-7
***
All financial statement schedules have been omitted as the required information either is not applicable or is
included in the financial statements or related notes.
F-1
Balance Sheets
December 31, 2015 and 2014
December 31,
2015
2014
Assets
Cash and cash equivalents
Stock in Federal Home Loan Bank ("FHLB") of Des Moines
Loans held for sale
Loans receivable, net of allowance for loan losses of
$485,561 and $485,561, respectively
Premises and equipment, net
Accrued interest receivable
Servicing asset
Other assets
Total assets
$ 10,955,771
58,900
451,029
7,702,148
91,600
656,510
37,761,046
1,299,669
166,588
307,132
20,532
$ 51,020,667
38,751,449
1,330,113
195,976
311,995
15,010
49,054,801
$ 42,693,263
1,734
43,410
1,276
63,140
42,802,823
39,890,263
1,675
1,000,000
16,711
62,574
78,140
41,049,363
-
-
4,077
3,214,876
4,998,891
8,217,844
$ 51,020,667
4,077
3,214,876
4,786,485
8,005,438
49,054,801
Liabilities and Stockholders' Equity
Deposits
Accrued interest on deposits
Advances from Federal Home Loan Bank of Des Moines
Other liabilities
Accrued income taxes
Deferred tax liabilities
Total liabilities
Commitments and contingencies
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued and outstanding
Common stock, $0.01 par value, 10,000,000 shares
authorized; 407,691 shares issued and outstanding
Additional paid-in capital
Retained earnings - substantially restricted
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to financial statements.
F-3
-
Statements of Earnings
Years Ended December 31, 2015 and 2014
Years Ended
December 31,
2015
2014
Interest income:
Loans receivable
Securities
Other interest-earning assets
Total interest income
Interest expense:
Deposits
Advances from FHLB
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for
loan losses
Noninterest income:
Mortgage servicing fee income
Other
Total noninterest income
Noninterest expense:
Compensation and benefits
Occupancy expense
Equipment and data processing expense
FDIC insurance premium expense
Professional and regulatory services
Advertising
Other
Total noninterest expense
Earnings before income tax expense
Income taxes:
Current
Deferred
Total income tax expense
Net earnings
Basic and diluted earnings per share
$
2,096,031
1,316
15,617
2,112,964
2,043,014
610
8,985
2,052,609
295,100
1,583
296,683
1,816,281
266,143
1,480
267,623
1,784,986
-
-
1,816,281
1,784,986
244,786
80,862
(67,228)
28,163
286,583
1,114,982
77,935
187,089
27,848
152,352
66,583
122,066
1,748,855
354,009
$
$
F-4
156,603
(15,000)
141,603
212,406
0.52
247,953
79,148
(59,352)
23,495
291,244
1,089,231
73,573
176,975
26,294
122,027
49,253
117,883
1,655,236
420,994
162,000
(5,000)
157,000
263,994
0.65
Statements of Stockholders’ Equity
Preferred
Stock
Balance at December 31, 2013
$
Net earnings
$
Net earnings
$
Additional
Paid-In
Capital
Common
Stock
Retained
Earnings
Total
Stockholders'
Equity
-
4,077
3,214,876
4,522,491
7,741,444
-
-
-
263,994
263,994
-
4,077
3,214,876
4,786,485
8,005,438
-
-
-
212,406
212,406
-
4,077
3,214,876
4,998,891
8,217,844
F-5
Statements of Cash Flows
Years Ended
December 31,
2015
2014
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net
cash provided by (used for) operating activities:
Provision for loan losses
Depreciation expense
Decrease (increase) in accrued interest receivable
Loans originated for sale
Proceeds from sale of loans, net
Change in other assets and other liabilities, net
Net cash provided by (used for) operating activities
Cash flows from investing activities:
Net decrease (increase) in loans receivable
Certificates of deposit - proceeds from maturity
Redemption (purchase) of FHLB stock
Purchase of premises and equipment
Net cash provided by (used for) investing activities
Cash flows from financing activities:
Net increase in deposits
(Repayment of) proceeds from FHLB advances
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and advances from FHLB
Federal and state income taxes
Real estate acquired in settlement of loans
F-6
$
212,406
263,994
-
-
71,021
67,228
(244,786)
29,388
(12,955,653)
13,343,555
(51,593)
471,566
69,796
59,352
(247,953)
(34,485)
(11,837,766)
11,596,509
(32,543)
(163,096)
986,934
-
32,700
(40,577)
979,057
$
2,803,000
(1,000,000)
1,803,000
3,253,623
7,702,148
10,955,771
(2,682,991)
99,000
(42,500)
(8,058)
(2,634,549)
4,822,071
1,000,000
5,822,071
3,024,426
4,677,722
7,702,148
$
296,624
217,718
267,600
162,991
$
-
-
Notes to Financial Statements
December 31, 2015 and 2014 and
(1)
Summary of Significant Accounting Policies
On July 25, 2013, Quarry City Savings and Loan Association completed its conversion from a statechartered mutual savings association to a state-chartered capital stock savings association. The
public offering was consummated through the sale and issuance by Quarry City Savings and Loan
Association of 407,691 shares of common stock at $10 per share. Net proceeds of $3.2 million were
raised in the stock offering, after deduction of conversion costs of $858,000.
Quarry City Savings and Loan Association’s common stock is traded on the Over the Counter Bulletin
Board.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the
source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by FASB
to be applied to nongovernmental entities.
The following comprise the significant accounting policies which Quarry City Savings and Loan
Association (“Association”) follows in preparing and presenting its financial statements:
a. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks
and interest-bearing funds in other banks with original maturities of three months or less. The
Association maintains cash in correspondent bank accounts which at times exceed Federally
insured limits. The Association’s management monitors the balances in these accounts and
periodically assesses the financial condition of the correspondent banks. Interest-bearing funds in
other banks were $10,428,490 and $7,214,006 at December 31, 2015 and 2014, respectively.
b. Certificates of deposit are carried at cost, and have original maturities of more than three months.
c. Securities classified as available for sale are reported at fair value, with unrealized gains and losses
excluded from operations and reported as a separate component of stockholders’ equity.
Securities which the Association has the positive intent and ability to hold to maturity are classified
as held to maturity securities and reported at cost, adjusted for amortization of premiums and
accretion of discounts over the life of the security using the interest method. The Association does
not purchase securities for trading purposes. The cost of securities sold is determined by specific
identification.
Declines in fair value of securities that are deemed to be other-than-temporary are charged to
operations as a realized loss. In estimating if losses are other-than-temporary, management
considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial
condition and near term prospects of the issuer, (3) the Association's intent to sell the security or
whether it is more likely than not that it will be required to sell the security before the anticipated
recovery of its remaining amortized cost basis and (4) evaluation of cash flows to determine if they
have been adversely affected.
F-7
FHLB stock is evaluated for impairment in accordance with FASB ASC 942-325-35, “Financial
Services - Depository and Lending – Investments - Other.” Determination of whether the FHLB
stock is impaired is based on the assessment of the ultimate recoverability of cost rather than by
recognizing declines in value and is influenced by the significance of the decline in net assets
compared to the capital of the FHLB and the length of time this situation has persisted; the ability
of the FHLB to make payments required by law or regulation and operating performance; the
impact of legislative and regulatory changes on member institutions and customer base and the
liquidity position of the FHLB. Management believes that no impairment charge on FHLB stock is
necessary at December 31, 2015 or 2014.
Stock in FHLB of Des Moines is recorded at cost, which represents redemption value. The required
investment in the common stock is based upon a percentage of the Association’s assets and
FHLB advances.
d. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
aggregate cost or market, as determined by outstanding commitments from investors. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to operations. Gains
and losses on sales of mortgage loans are based on the difference between the selling price and
the carrying value of the related loan sold and reported in noninterest income.
e. Loans receivable, net are carried at unpaid principal balances, less allowance for losses, loans in
process, discounts, deferred income and net deferred loan costs. Loan origination and
commitment fees and certain direct loan origination costs are deferred and amortized to interest
income over the contractual life of the loan using the interest method.
f.
Allowance for losses is available to absorb losses incurred on loans receivable and represents
additions charged to expense, less net charge-offs. Loans are charged-off in the period deemed
uncollectible. Recoveries of loans previously charged-off are recorded when received.
The allowance consists of allocated and general components. The allocated component relates to
loans that are individually classified as impaired, for which the carrying value of the loan exceeds
the fair value of the collateral or the present value of expected future cash flows, or loans
otherwise adversely classified. The general component covers non-classified loans and is based
on the historical loan loss experience for the last three years, including adjustments to historical
loss experience, maintained to cover uncertainties that affect the Association’s estimate of
probable losses for each loan type. The adjustments to historical loss experience are based on
evaluation of several factors, including primarily changes in the lending policies and procedures;
collection, charge-off and recovery practices; nature and volume of the loan portfolio; volume and
severity of nonperforming loans; existence and effect of any concentrations of credit and the level
of such concentrations and current, national and local economic and business conditions. The
general component also includes an unallocated allowance to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component of the allowance reflects
the imprecision inherent in the underlying assumptions used in the methodologies for estimating
the general component.
Management believes that all known and inherent losses in the loan portfolio that are probable and
reasonable to estimate have been recorded as of each balance sheet date.
F-8
g. The Association considers a loan to be impaired when, based on current information and events, it
is probable that the Association will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. The types of loans for which
impairment is measured under FASB ASC 310-10-15, “Receivables,” include nonaccrual income
property loans and troubled debt restructurings where concessions have been granted to
borrowers experiencing financial difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other
actions intended to maximize collection. Such loans are placed on nonaccrual status at the point
they are deemed uncollectible. Impairment losses are recognized through an increase in the
allowance for loan losses. A loan is considered delinquent when a payment has not been made
by the contractual due date.
The Association follows FASB ASC 310-30, “Receivables-Loans and Debt Securities Acquired with
Deteriorated Credit Quality,” and reviews each loan acquired to determine whether there is
evidence of deterioration of credit quality since origination and it is probable that the Association
will be unable to collect all amounts due according to the loan’s contractual terms.
If both conditions exist, such loans are accounted for individually or pooled based upon common
characteristics, including loan type. The excess of the scheduled contractual payments over all
cash flows expected at acquisition of the individual loans or pools is a nonaccretable difference.
The amount representing the excess of the loan’s cash flows expected to be collected over the
amount paid for the loans is accreted into interest income over the remaining life of the loan or
pool as an accretable yield with consideration of actual prepayments. Over the remaining life or
pool, the Association continues to estimate cash flows expected to be collected. For loans with
decreases in cash flows expected to be collected, a loss is recognized. For loans with increases
in cash flows expected to be collected, the accretable yield is increased and recognized on a
prospective basis over the remaining life of the loan or pool. Allowance for losses on acquired
loans reflects only losses incurred after acquisition.
h. Premises and equipment, net are carried at cost, less accumulated depreciation. Depreciation
of premises and equipment is computed using the straight-line method based on the estimated
useful lives of the related assets. Estimated lives are generally twenty to thirty-nine years for
office building and improvements and five to ten years for furniture and equipment.
i.
Foreclosed real estate held for sale is carried at fair value less estimated costs to sell. Costs related
to the development and improvements of foreclosed real estate are capitalized. Allowance for
losses on foreclosed real estate are available to absorb losses incurred on foreclosed real estate
held for sale and represents additions charged to expense, less net gains or losses. In determining
the allowance for losses to be maintained, management evaluates current economic conditions, fair
value of the underlying collateral and risk characteristics of the foreclosed real estate held for sale.
Foreclosed real estate also includes properties for which the Association has taken physical
possession, even though formal foreclosure proceedings have not taken place.
j.
Interest on securities, certificates of deposit, and loans receivable is accrued as earned. Interest on
loans receivable is excluded from income when considered uncollectible. Past due status is
based on the contractual terms of the loan. When a loan is classified as nonaccrual, accrued
interest is reversed against current income. Subsequent collection of interest on nonaccrual loans
is recorded as income when received or applied to reduce the loan balance. Accrual of interest is
resumed on previously classified nonaccrual loans, when there is no longer any reasonable doubt
as to the timely collection of interest. Accrued interest receivable at December 31, 2015 and
2014 relates primarily to loans receivable.
F-9
k. Servicing assets on originated loans that have been sold are capitalized by allocating the total cost
of the mortgage loans between the servicing assets and the loans based on their relative fair
values. For purposes of measuring the impairment, the servicing asset is stratified based on the
predominant risk characteristics of the underlying loans including type of loan, interest rate and
loan age. The amount of impairment recognized in non-interest expense represents the amount
by which the capitalized mortgage servicing assets for a stratum exceeds the related fair value.
Capitalized servicing assets are amortized in proportion to and over the period of estimated net
servicing revenues.
l.
Deferred income tax assets and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount that will more likely than not be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the net change in the
deferred tax assets and liabilities.
The FASB has issued guidance for how uncertain tax positions should be recognized, measured,
disclosed and presented in the financial statements. This guidance requires the evaluation of tax
positions taken or expected to be taken in the course of preparing the Association’s Federal and
state tax returns to determine whether the tax positions are “more-likely-than-not” of being
sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions
deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the
current year.
The Association is subject to U.S. Federal income taxes and State of Missouri taxes. Tax years
ending December 31, 2012 and thereafter remain open to examination by these jurisdictions. The
Association recognizes interest and penalties related to tax positions in income tax expense. At
December 31, 2015 and 2014 there was no accrual for uncertain tax positions or related interest.
m. Earnings per share for the year ending December 31, 2015 were based upon net earnings of
$212,406 and weighted-average shares outstanding of 407,691. Earnings per share for the year
ended December 31, 2014 were based upon net earnings of $263,994 and weighted-average
shares outstanding of 407,691.
n. The Association has one reportable segment. The Association’s chief operating decision-maker
uses financial results to make operating and strategic decisions.
o. Subsequent events have been evaluated through March 28, 2016 which is the date the financial
statements were issued.
p. The Association does not believe there are any recent accounting pronouncements that may have a
material impact on the financial statements or note disclosures.
F-10
(2)
Risks and Uncertainties
The Association is a community oriented financial institution that provides traditional financial services
within the areas it serves. The Association is engaged in the business of attracting deposits from the
general public and using these funds to originate primarily one- to four-family residential loans and, to a
lesser extent, agricultural, commercial and consumer loans to customers located primarily in
Warrensburg, Missouri and the surrounding area. The Association has no subsidiaries.
The financial statements have been prepared in conformity with U.S. generally accepted accounting
principles. In preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the balance sheet dates
and income and expenses for the periods covered. Actual results could differ significantly from these
estimates and assumptions.
The Association's operations are affected by interest rate risk, credit risk, market risk and regulations by
the Federal Deposit Insurance Corporation (“FDIC”) and the Missouri Division of Finance. The
Association is subject to interest rate risk to the degree that its interest-bearing liabilities mature or
reprice more rapidly, or on a different basis, than its interest-earning assets. The Association uses a
net market value methodology provided by an outside consulting firm to measure its interest rate risk
exposure. This exposure is a measure of the potential decline in the economic value of equity based
upon the effect of an increase or decrease in interest rates in 50 and 100 basis point increments.
Economic value of equity is the expected net cash flows from the institution's assets, liabilities and offbalance sheet contracts. Credit risk is the risk of default on the Association's loan portfolio that results
from the borrowers' inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of collateral underlying loans and the valuation of real estate held by the
Association. The Association is subject to periodic examination by regulatory agencies which may
require increases in the allowances based on their evaluation of available information. There can be
no assurance that the Association's regulators will not require further increases to the allowances.
(3)
Loans Receivable, Net
Loans receivable, net are summarized as follows:
December 31,
2015
2014
Real estate loans:
Single-family, 1-4 units
Construction
Commercial, multi-family, and land
Agricultural
Commercial and agricultural non-real estate
Consumer
$ 20,789,534
5,975,458
10,353,613
2,748,229
954,062
917,530
41,738,426
(5,237)
(485,561)
(12,037)
(649)
(57,005)
(3,416,891)
$ 37,761,046
Deferred loan (fees) costs, net
Allowance for losses
Accretable discount
Credit quality discount
Deferred income
Loans in process
Total, 5.13% and 5.26%
F-11
19,909,119
5,811,564
11,487,158
2,848,708
1,157,550
779,353
41,993,452
564
(485,561)
(12,037)
(7,814)
(59,109)
(2,678,046)
38,751,449
Adjustable-rate loans of approximately $3,162,000 and $4,072,000 were included in the portfolio at
December 31, 2015 and 2014, respectively.
Single-family, 1-4 units, including construction
Single-family loans and single-family construction loans are underwritten based on the applicant’s
employment and credit history and the appraised value of the property. Repayment of these loans is
primarily dependent on the personal income of the borrowers, which can be impacted by economic
conditions in their market areas, such as unemployment levels. Repayment can also be impacted by
changes in property values on residential properties. Risk is mitigated by the fact that the loans are
of smaller individual amounts and spread over a large number of borrowers.
Commercial, multi-family and land
Commercial, multi-family and land loans are secured primarily by office buildings, storage facilities,
apartment complexes and various income-producing and other properties. These loans are
underwritten based on the economic viability of the property and creditworthiness of the borrower,
with emphasis given to projected cash flow as a percentage of debt service requirements. These
loans carry significant credit risks as they involve larger balances concentrated with single borrowers
or groups of related borrowers. Repayment of loans secured by income-producing properties
generally depends on the successful operation of the real estate project and may be subject to a
greater extent to adverse market conditions and the general economy.
Agricultural real estate
Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-tovalue ratios on loans secured by farmland generally do not exceed 80% and have amortization
periods limited to twenty years.
Commercial non-real estate loans are primarily based on the identified cash flows of the borrower and
secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers,
however, may not be as expected and the collateral securing these loans may fluctuate in value.
Most commercial non-real estate loans are secured by the assets being financed or other business
assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term
loans may be made on an unsecured basis.
Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of
equipment, livestock and seasonal operating lines to cash grain farmers to plant and harvest corn and
soybeans. Specific underwriting standards have been established for agricultural-related loans
including the establishment of projections for each operating year based on industry developed
estimates of farm input costs and expected commodity yields and prices. Operating lines are typically
written for one year and secured by the crop and other farm assets as considered necessary.
Agricultural real estate and non-real estate loans carry significant credit risks as they involve larger
balances concentrated with single borrowers or groups of related borrowers. In addition, repayment
of such loans depends on the successful operation or management of the farm property securing the
loan or for which an operating loan is utilized. Farming operations may be affected by adverse
weather conditions such as drought, hail or floods that can severely limit crop yields.
F-12
Consumer
Consumer loans include automobile, signature and other consumer loans. Potential credit risks include
rapidly depreciable assets, such as automobiles, which could adversely affect the value of the
collateral.
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31, 2015:
Real estate loans:
Construction
Agricultural
Consumer
Unallocated
Beginning
Balance
$
$
Year Ended December 31, 2014:
Real estate loans:
Construction
Agricultural
Consumer
Unallocated
121,343
48,113
157,133
42,731
30,554
371
85,316
485,561
Beginning
Balance
$
$
121,884
36,909
157,593
43,546
52,048
4,619
1,768
418,367
F-13
Provision for
Losses
Charge-offs
Recoveries
(1,096)
(9,192)
(39,796)
(1,507)
(5,372)
273
56,690
-
-
Ending
Balance
-
Provision for
Losses
Charge-offs
Recoveries
(541)
11,204
(460)
(815)
(88,688)
(4,248)
83,548
-
(14,626)
(14,626)
81,820
81,820
120,247
38,921
117,337
41,224
25,182
644
142,006
485,561
Ending
Balance
121,343
48,113
157,133
42,731
30,554
371
85,316
485,561
Recorded investment in loans is summarized as follows:
At December 31, 2015:
Real estate loans:
$
Construction
Agricultural
Consumer
Unallocated
$
Real estate loans:
$
Construction
Agricultural
Consumer
Unallocated
$
Individually
Evaluated
for Impairment
28,141
28,141
Individually
Evaluated
for Impairment
31,633
32,244
63,877
Loans Acquired
Collectively
With
Evaluated
Deterioration
for Impairment
of Credit
92,106
38,921
117,337
41,224
25,182
644
142,006
457,420
-
120,247
38,921
117,337
41,224
25,182
644
142,006
485,561
Loans Acquired
Collectively
With
Evaluated
Deterioration
for Impairment
of Credit
89,710
48,113
124,889
42,731
30,554
371
85,316
421,684
Total
Individually
Evaluated
for Impairment
-
Total
281,405
281,405
Individually
Evaluated
for Impairment
121,343
48,113
157,133
42,731
30,554
371
85,316
485,561
316,011
322,118
638,129
Loans
Loans Acquired
Collectively
With
Evaluated
Deterioration
for Impairment
of Credit
20,508,129
5,975,458
10,353,613
2,609,057
954,062
914,381
41,314,700
139,172
3,149
142,321
Loans
Loans Acquired
Collectively
With
Evaluated
Deterioration
for Impairment
of Credit
19,593,108
5,811,564
11,165,040
2,700,683
1,157,550
772,111
41,200,056
148,025
7,242
155,267
Total
20,789,534
5,975,458
10,353,613
2,748,229
954,062
917,530
41,738,426
Total
19,909,119
5,811,564
11,487,158
2,848,708
1,157,550
779,353
41,993,452
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-1035-16), when based on current information and events, it is probable the Association will be unable to
collect all amounts due from the borrower in accordance with the contractual terms of the loan.
Non-acquired impaired loans and nonperforming loans are summarized as follows:
Real estate loans:
$
Construction
Agricultural
Consumer
$
With
Allowance
for Losses
With no
Allowance
for Losses
281,405
281,405
-
F-14
Non-acquired Impaired Loans
Unpaid
Principal
Total
Balance
281,405
281,405
281,405
281,405
Allowance
for
Losses
Average
Recorded
Investment
28,141
28,141
287,706
287,706
Nonperforming Loans
Past Due 90
Accruing
Days and More Troubled Debt
Nonaccrual Still Accruing Restructurings
Real estate loans:
Construction
Agricultural
Consumer
$
$
Real estate loans:
$
Construction
Agricultural
Consumer
$
With
Allowance
for Losses
With no
Allowance
for Losses
316,011
322,118
638,129
-
281,405
281,405
-
Non-acquired Impaired Loans
Unpaid
Principal
Total
Balance
316,011
322,118
638,129
316,011
322,118
638,129
-
281,405
281,405
Allowance
for
Losses
Average
Recorded
Investment
31,633
32,244
63,877
319,605
80,529
400,134
Nonperforming Loans
Past Due 90
Accruing
Days and More Troubled Debt
Nonaccrual Still Accruing Restructurings
Real estate loans:
Construction
Agricultural
Consumer
$
$
316,011
322,118
638,129
-
Total
-
Total
316,011
322,118
638,129
For the years ended December 31, 2015 and 2014, gross interest income that would have been recorded
had the non-accruing loans been current in accordance with their original terms and interest income
recognized on such loans was considered insignificant.
F-15
The loan portfolio aging analysis is summarized as follows:
Real estate loans:
Construction
Agricultural
Consumer
30-59
$
$
Real estate loans:
Construction
Agricultural
Consumer
$
$
Days Past Due
90 or more
60-89
218,663
73,400
292,063
-
30-59
60-89
469,591
231,720
701,311
242,885
242,885
119,491
119,491
Days Past Due
90 or more
130,806
79,232
210,038
Current
20,670,043
5,975,458
10,353,613
2,529,566
954,062
844,130
41,326,872
Current
19,308,722
5,811,564
10,933,321
2,848,708
1,157,550
779,353
40,839,218
Total
20,789,534
5,975,458
10,353,613
2,748,229
954,062
917,530
41,738,426
Total
19,909,119
5,811,564
11,487,158
2,848,708
1,157,550
779,353
41,993,452
The Association generally categorizes all classes of loans into risk categories based on relevant
information about the ability of borrowers to service their debt such as: current financial information,
historical payment experience, credit documentation, public information, and current economic trends,
among other factors. Generally, smaller dollar consumer loans are excluded from this grading process
and are reflected in the Pass category. The delinquency trends of these consumer loans are
monitored on homogeneous basis.
The Association uses the following definitions for risk ratings:
The Pass asset quality rating encompasses assets that have generally performed as expected. With the
exception of some smaller consumer and residential loans, these assets generally do not have
delinquency. Loans assigned this rating include loans to borrowers possessing solid credit quality with
acceptable risk.
The Special Mention asset quality rating encompasses assets that have potential weaknesses that
deserve management’s close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan. Special mention assets are not adversely
classified and do not expose an institution to sufficient risk to warrant adverse classification. This
grade is intended to include loans to borrowers whose credit quality has clearly deteriorated and
where risk of further decline is possible unless active measures are taken to correct the situation.
The Substandard asset quality rating encompasses assets that are inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral pledged, if any; assets having a
well-defined weakness based upon objective evidence; assets characterized by the distinct possibility
that the Association will sustain some loss if the deficiencies are not corrected; or the possibility that
liquidation will not be timely. Loans categorized in this grade possess a well-defined credit weakness
and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration
F-16
has occurred and very close attention is warranted to ensure the full repayment without loss.
Collateral coverage may be marginal.
Doubtful asset quality rating encompasses assets that have all of the weaknesses of those classified as
substandard. In addition, these weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable.
The Loss asset quality rating encompasses assets that are considered uncollectible and of such little
value that their continuance as assets is not warranted. A loss classification does not mean that an
asset has no recovery or salvage value; instead, it means that it is not practical or desirable to defer
writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may
be realized in the future.
Credit risk profile is summarized as follows:
Credit Quality Indicator-Credit Risk Profile by Grade or Classification
Real estate loans:
$
Construction
Agricultural
Consumer
$
Special
Mention
Substandard
157,497
316,024
473,521
Doubtful
623,612
623,612
Loss
-
-
Pass
Total
20,008,425
5,975,458
10,037,589
2,748,229
954,062
917,530
40,641,293
20,789,534
5,975,458
10,353,613
2,748,229
954,062
917,530
41,738,426
Credit Quality Indicator-Credit Risk Profile by Grade or Classification
Real estate loans:
$
Construction
Agricultural
Consumer
$
Special
Mention
207,968
267,132
102,258
577,358
Substandard
659,279
322,117
981,396
Doubtful
Loss
-
-
Pass
Total
19,041,872
5,811,564
10,897,909
2,848,708
1,055,292
779,353
40,434,698
19,909,119
5,811,564
11,487,158
2,848,708
1,157,550
779,353
41,993,452
As of December 31, 2015, the Association did not have any loan in process of foreclosure.
F-17
Following is a summary of loan activity for directors, executive officers and associates of such persons
for the year ended December 31, 2015:
Balance, beginning of year
Additions
Repayments
Balance, end of year
$
$
794,400
964,050
(439,991)
1,318,459
Such loans were made on substantially the same terms as those prevailing at the time for comparable
transactions with unaffiliated persons.
On April 28, 2010, the Association acquired certain loans from the FDIC. These loans are not
covered by an FDIC loss share agreement. No bargain purchase gain was recognized. Following is a
summary of the transaction, including loans acquired, accretable discount and credit quality discount:
Loans acquired
Fair value adjustment, accretable discount
Cash paid in acquisition of loans
Credit quality discount at acquisition
(4)
$
$
482,595
(31,053)
(300,000)
151,542
Premises and Equipment, Net
Premises and equipment, net are summarized as follows:
December 31,
2015
2014
Land
Office building
Furniture and equipment
$
Accumulated depreciation
$
161,100
1,150,223
422,107
1,733,430
(433,761)
1,299,669
161,100
1,150,223
381,530
1,692,853
(362,740)
1,330,113
Depreciation expense for the years ended December 31, 2015 and 2014 was $71,021 and $69,796,
respectively.
F-18
(5) Servicing Asset
The Association sells fixed-rate single-family, residential loans with servicing retained and no recourse to
the FHLB of Des Moines under the Mortgage Partnership Finance Xtra program. Mortgage loans
serviced for others at December 31, 2015 and 2014 were $32,714,430 and $31,981,042, respectively.
Servicing asset is summarized as follows:
December 31,
2015
2014
Beginning balance
Additions
Amortization
$
Valuation allowance
Ending balance
$
311,995
62,365
(67,228)
307,132
326,686
44,661
(59,352)
311,995
-
-
307,132
311,995
There was no activity in the valuation allowance for the years ended December 31, 2015 and 2014.
(6) Deposits
Deposits are summarized as follows:
December 31,
2015
2014
Description and interest rate
Non-interest bearing checking accounts
Checking accounts, .29% and .29%
Passbook accounts, .25% and .25%
Total transaction accounts
Certificates:
0.01 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
Total certificates, 1.08% and 1.10%
Total deposits, .69% and .71%
$
2,183,545
10,710,211
6,736,471
19,630,227
1,752,494
10,233,181
6,173,090
18,158,765
12,480,349
9,417,951
1,164,736
12,859,759
6,561,279
2,307,809
2,651
21,731,498
39,890,263
-
$
23,063,036
42,693,263
The aggregate amount of certificates of $250,000 or more at December 31, 2015 and 2014 were
$1,043,700 and $779,657, respectively.
There were no brokered deposits at December 31, 2015 or 2014.
F-19
Certificate maturities are summarized as follows:
December 31,
2015
2014
First year
Second year
Third year
Fourth year
Fifth year
Total certificates
$
$
11,679,445
2,968,306
1,935,786
3,937,633
2,541,866
23,063,036
10,683,623
4,537,961
1,439,386
1,358,335
3,712,193
21,731,498
Interest expense on deposits is summarized as follows:
Years Ended
December 31,
2015
2014
Checking accounts
Passbook accounts
Certificates
Total interest on deposits
(7)
$
$
30,696
16,763
247,641
295,100
28,969
15,768
221,406
266,143
Advances from FHLB of Des Moines
There were no advances from FHLB at December 31, 2015. Advances are secured by FHLB stock and
single-family loans. The Association pledged loans totaling $5.7 million, or an advance equivalent of
$4.2 million. At December 31, 2014, advances from FHLB of Des Moines consisted of an open line of
credit of $1.0 million with an interest rate of 0.28%.
(8)
Income Taxes
Retained earnings at December 31, 2015 include approximately $430,000 which represents tax bad
debt reserves for which no provision for income taxes has been recorded in the accompanying
financial statements. If these tax bad debt reserves are used for other than loan losses, the amount
used will be subject to income taxes at the then prevailing corporate rate.
F-20
Income taxes are summarized as follows:
Years Ended
December 31,
2015
2014
Current:
Federal
State
$
Deferred:
Federal
State
$
135,903
20,700
156,603
142,000
20,000
162,000
(12,000)
(3,000)
(15,000)
141,603
(4,000)
(1,000)
(5,000)
157,000
The components of the net deferred tax liabilities are summarized as follows:
December 31,
2015
2014
Deferred tax liabilities:
Accrued income and expense
Servicing asset
Tax over book accumulated depreciation
Other
Total deferred tax liabilities
$
65,769
113,639
67,875
247,283
77,299
115,438
67,760
209
260,706
151,658
21,092
11,393
184,143
151,658
21,870
9,038
182,566
-
Deferred tax assets:
Allowance for loan losses
Deferred income
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Net deferred tax liabilities
-
$
F-21
184,143
63,140
-
182,566
78,140
The provision for income taxes differs from the Federal statutory corporate tax rate of 34% as follows:
Years Ended
December 31,
2015
2014
Federal statutory income tax rate
Increases in tax rate:
State taxes, net of Federal taxes
Other, net
Tax rate
(9)
34.0 %
34.0 %
2.9
3.1
40.0 %
3.1
0.2
37.3 %
Employee Benefits
Any employee who has attained 21 years of age or older and has performed service for the Association
within at least three out of the immediately preceding five calendar years is eligible to participate in
the Quarry City Savings and Loan Association Simplified Employee Pension Plan. Contributions to
the plan are discretionary and may be up to 25% of compensation. Deposits are made into Simplified
Employee Pension Individual Retirement Accounts and are fully vested at all times. Expense for the
Plan years ended December 31, 2015 and 2014 was $36,248 and $37,064, respectively.
(10) Stockholders’ Equity and Regulatory Capital Requirements
On July 25, 2013, Quarry City Savings and Loan Association completed its conversion from a statechartered mutual savings association to a state-chartered capital stock savings association. The
public offering was consummated through the sale and issuance by Quarry City Savings and Loan
Association of 407,691 shares of common stock at $10 per share. Net proceeds of $3.2 million were
raised in the stock offering, after deduction of conversion costs of $858,000.
Quarry City Savings and Loan Association’s common stock is traded on the Over the Counter Bulletin
Board.
Voting rights are held and exercised exclusively by the stockholders of the Association. Deposit
account holders will continue to be insured by the FDIC. A liquidation account was established in the
amount of $4.3 million, which represented the Association’s total equity capital as of December 31,
2012, the latest balance sheet date in the final offering circular used in the conversion. The
liquidation account will be maintained for the benefit of eligible holders who continue to maintain their
accounts at the Association. The liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore
an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation
of the Association, and only in such event, each eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the adjusted qualifying account
balances then held.
The Association may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect
thereof would cause equity capital to be reduced below the liquidation account amount or regulatory
capital requirements.
F-22
The Association is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can result in mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on the Association’s financial statements. Under capital adequacy guidelines, the Association
must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices.
The Association’s capital amounts and classifications are also subject to judgments by the regulators
about components, risk-weightings and other factors. At December 31, 2015 and 2014, the
Association met all capital adequacy requirements. The Association is also subject to the regulatory
framework for prompt corrective action. At December 31, 2015 and 2014, the most recent notification
from the regulatory agencies categorized the Association as well capitalized. To be categorized as
well capitalized, the Association must maintain minimum total risk-based, Tier 1 risk-based, common
equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the aforementioned notifications that management believes have changed
the Association’s category.
The Association’s actual and required capital amounts and ratios are summarized as follows:
Actual
Amount Ratio
December 31, 2015
Equity
Disallowed servicing asset
Tier 1 capital
General valuation allowance (1)
Total capital to risk-weighted assets
$
Minimum Required
For Capital
To be "Well
Adequacy
Capitalized"
Amount Ratio
Amount Ratio
8,218
-
$
8,218
383
8,601
28.2%
$ 2,444
8.0% $ 3,054
10.0%
Tier 1 capital to risk-weighted assets $
8,218
26.9%
$ 1,833
6.0% $ 2,444
8.0%
Common equity Tier 1 capital to
risk-weighted assets
$
8,218
26.9%
1,374
4.5%
1,985
6.5%
Tier 1 capital to total assets
$
8,218
15.9%
$ 2,072
4.0% $ 2,590
5.0%
F-23
Actual
Amount Ratio
December 31, 2014
Equity
Disallowed servicing asset
Tier 1 capital
General valuation allowance (1)
Total capital to risk-weighted assets
$
Minimum Required
For Capital
To be "Well
Adequacy
Capitalized"
Amount Ratio
Amount Ratio
8,005
(31)
7,974
420
8,394
25.1%
$ 2,681
8.0% $ 3,351
10.0%
Tier 1 capital to risk-weighted assets $
7,974
23.8%
$ 1,340
4.0% $ 2,011
6.0%
Tier 1 capital to total assets
7,974
16.3%
$ 1,961
4.0% $ 2,451
5.0%
$
$
(1) Limited to 1.25% of risk-weighted assets.
(11) Commitments
The Association is a party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments generally include
commitments to originate loans. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet. The Association’s
maximum exposure to credit loss in the event of nonperformance by the borrower is represented by
the contractual amount and related accrued interest receivable of those instruments. The Association
minimizes this risk by evaluating each borrower’s creditworthiness on a case-by-case basis.
Generally, collateral held by the Association consists of a first or second mortgage on the borrower’s
property. Commitments at December 31, 2015 to originate loans and fund loans in process were
$5,167,000. Commitments at December 31, 2015 to fund unused lines of credit were $2,233,000.
(12) Contingencies
At December 31, 2015, there was no known pending litigation or other claims that management
believes will be material to the Association’s financial position.
(13) Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. The guidance establishes a
fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date.
F-24
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
Securities available for sale are classified within Level 2 of the valuation hierarchy. The Association
obtains fair value measurements for securities from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash flows,
the U.S Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
spreads, credit information and the bond’s terms and conditions, among other things. There were no
securities available for sale at December 31, 2015 or 2014.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an
entity’s own assumptions about the assumptions that market participants would use in pricing the
assets or liabilities.
Assets and liabilities reported at their fair value as of December 31, 2015 and 2014 by level within the
ASC 820 fair value measurement hierarchy:
Fair Value Measurements
Assets
Total
(Level 1)
(Level 2)
(Level 3)
December 31, 2015:
Impaired loans
Foreclosed real estate
$
281,405
-
-
-
281,405
-
December 31, 2014:
Impaired loans
Foreclosed real estate
$
638,129
-
-
-
638,129
-
There were no transfers between Level 1 and Level 2 or into or out of Level 3 categorizations for the
years presented. The above Level 3 assets are measured on a non-recurring basis. The significant
unobservable inputs include collateral method, adjusted for selling costs.
A description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis. The
instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment). Certain
impaired loans are reported at the fair value of underlying collateral if repayment is expected solely
from the collateral. Foreclosed real estate is initially recorded at fair value less estimated costs of
disposal, which establishes a new cost basis. Collateral values are estimated using Level 2 inputs
based on observable market data such as independent appraisals or level 3 inputs based on
customized discounting.
For the years ended December 31, 2015 and 2014, impaired loans had additional provisions for losses
of $0 and $0, respectively.
F-25
(14) Disclosure About the Fair Value of Financial Instruments
The carrying amount, estimated fair value and the financial hierarchy of the Association’s financial
instruments are summarized as follows:
December 31, 2015
Carrying
Estimated
Amount
Fair Value
Financial assets:
Cash and cash equivalents $
Stock in FHLB of Des Moines
Loans held for sale
Loans receivable
Financial liabilities:
Deposits
Advances from FHLB
10,955,771
58,900
451,029
37,761,046
166,588
10,955,771
58,900
451,029
39,094,011
166,588
10,955,771
-
58,900
451,029
38,812,606
166,588
281,405
-
42,693,263
1,734
-
42,022,979
1,734
-
-
42,022,979
1,734
-
-
December 31, 2014
Carrying
Estimated
Amount
Fair Value
Financial assets:
Cash and cash equivalents $
Stock in FHLB of Des Moines
Loans held for sale
Loans receivable
Financial liabilities:
Deposits
Advances from FHLB
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
Fair Value Measurements Using
(Level 1)
(Level 2)
(Level 3)
7,702,148
91,600
656,510
38,751,449
195,976
7,702,148
91,600
656,510
40,419,043
195,976
7,702,148
-
91,600
656,510
39,780,914
195,976
638,129
-
39,890,263
1,675
1,000,000
39,459,448
1,675
997,300
-
39,459,448
1,675
997,300
-
The following methods and assumptions were used in estimating the fair values shown above:
The carrying amounts of cash and cash equivalents and certificates of deposit approximate their fair
value.
The carrying value of Federal Home Loan Bank stock approximate fair value based on the redemption
provisions of the Federal Home Loan Bank.
For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values
are based on carrying values. Fair values for real estate and commercial loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable. Fair value of loans
held for sale is based on commitments on hand from investors or prevailing market rates.
F-26
The fair values of demand deposits are the carrying amounts at the reporting dates. Fair values for
fixed-rate CD’s and advances from FHLB are estimated using a discounted cash flow calculation that
applies interest rates currently being offered to a schedule of aggregated expected monthly
maturities.
The carrying amounts of accrued interest approximate their fair values.
Commitments to extend credit and standby letters of credit have short maturities and therefore have no
significant fair value.
F-27
Exhibit 21
{Clients/1505/00204442.DOC/3 }
SUBSIDIARIES OF THE REGISTRANT
None
{Clients/1505/00204442.DOC/3 }
EXHIBITS 31.1 AND 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
{Clients/1505/00204442.DOC/3 }
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steve Andrew, certify that:
1.
I have reviewed this annual report on Form 10-K of Quarry City Savings and Loan Association;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d15(f)) for the registrant and have:
5.
a)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b)
Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
{Clients/1505/00204442.DOC/3 }
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Andrew, certify that:
1.
I have reviewed this annual report on Form 10-K of Quarry City Savings and Loan Association;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
5.
a)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiary, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b)
Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s Board of Directors (or persons performing the equivalent functions):
{Clients/1505/00204442.DOC/3 }
EXHIBIT 32
CERTIFICATE PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
{Clients/1505/00204442.DOC/3 }

10-K Annual Report 12-31-2015 - Quarry City Savings and Loan

Transcription

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