EX-99.2 4 ex99_2.htm EXHIBIT 99.2
Exhibit 99.2

CAPSTONE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

   
Unaudited
September 30,
2017
    
December 31,
2016
  
ASSETS
            
CASH AND CASH EQUIVALENTS
            
Cash and due from banks
  
$
6,278,305
    
$
5,852,711
  
Federal funds sold
    
—
      
252,580
  
TOTAL CASH AND CASH EQUIVALENTS
    
6,278,305
      
6,105,291
  
Securities available-for-sale
    
52,539,451
      
43,272,056
  
Restricted equity securities
    
1,049,975
      
1,277,075
  
Loans held-for-sale
    
836,250
      
1,133,300
  
Loans, net of allowance for loan losses
    
418,728,691
      
403,749,009
  
Premises and equipment, net
    
12,882,309
      
13,357,380
  
Goodwill and other intangible assets
    
5,666,241
      
5,776,205
  
Bank-owned life insurance
    
10,011,525
      
9,836,278
  
Other assets
    
3,056,232
      
2,829,880
  
TOTAL ASSETS
  
$
511,048,979
    
$
487,336,474
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
DEPOSITS
  
$
352,361,551
    
$
333,337,175
  
Interest-bearing deposits
    
85,566,268
      
81,177,278
  
Noninterest-bearing deposits
    
437,927,819
      
414,514,453
  
TOTAL DEPOSITS
    
8,988,275
      
12,218,608
  
FHLB advances & other borrowings
    
2,631,999
      
2,703,669
  
Accounts payable and accrued liabilities
    
449,548,093
      
429,436,730
  
TOTAL LIABILITIES
                
STOCKHOLDERS’ EQUITY
                
Common stock, Class A voting, $.01 par value; 30,000,000 shares authorized; 4,349,885 shares issued at September 30,  2017 and 2016; 4,276,726 and 4,261,378 outstanding at September 30, 2017 and 2016, respectively
    
43,499
      
43,499
  
Common stock, Class B nonvoting, $.01 par value; 15,000,000 shares authorized; none issued
    
—
          
Common stock, Class C nonvoting, $.01 par value; 15,000,000 shares authorized; none issued
    
—
          
Treasury stock, 73,159 shares, at cost at September 30, 2017 and 88,507 shares, at cost at September 30, 2016
    
(731,590
)
    
(874,970
)
Additional paid-in capital
    
44,507,259
      
44,500,768
  
Retained earnings
    
17,487,132
      
14,554,780
  
Accumulated other comprehensive income (loss)
    
194,586
      
(324,333
)
TOTAL STOCKHOLDERS’ EQUITY
    
61,500,886
      
57,899,744
  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
511,048,979
    
$
487,336,474
  

The Notes to Consolidated Financial Statements are an integral part of these statements.
 
1
CAPSTONE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

   
Unaudited
Nine Months Ended
September 30,
  
   
2017
    
2016
  
INTEREST INCOME
            
Interest and fees on loans
  
$
14,790,172
    
$
13,212,351
  
Taxable investment securities
    
777,496
      
603,700
  
Nontaxable investment securities
    
71,927
      
65,586
  
Interest on federal funds sold and deposits in banks
    
93,240
      
19,853
  
Total interest income
    
15,732,835
      
13,901,490
  
INTEREST EXPENSE
                
Interest on deposits
    
2,100,116
      
1,620,003
  
Interest on borrowed funds
    
72,849
      
96,405
  
Total interest expense
    
2,172,965
      
1,716,408
  
PROVISION FOR LOAN LOSSES
    
862,500
      
785,000
  
NET INTEREST INCOME AFTER
                
PROVISION FOR LOAN LOSSES
    
12,697,370
      
11,400,082
  
NONINTEREST INCOME
                
Service charges on deposit accounts
    
872,235
      
843,500
  
Mortgage loan origination income
    
670,890
      
724,989
  
ATM fee income
    
302,119
      
259,033
  
Income from bank-owned life insurance
    
175,247
      
177,636
  
Other income
    
111,485
      
162,732
  
Total noninterest income
    
2,131,976
      
2,167,890
  
NONINTEREST EXPENSES
                
Employee compensation
    
5,058,378
      
4,754,848
  
Occupancy expenses
    
1,267,313
      
1,297,398
  
Employee benefits
    
1,137,192
      
1,050,064
  
Other
    
3,028,522
      
2,543,212
  
Total noninterest expenses
    
10,491,405
      
9,645,522
  
INCOME BEFORE INCOME TAX EXPENSE
    
4,337,941
      
3,922,450
  
INCOME TAX EXPENSE
    
1,405,589
      
1,265,382
  
NET INCOME
  
$
2,932,352
    
$
2,657,068
  

The Notes to Consolidated Financial Statements are an integral part of these statements.
 
2
CAPSTONE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
For the Nine Months Ended September 30, 2017

   
Common
Stock
    
Treasury Stock
    
Additional
Paid-in
Capital
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
Stockholders'
Equity
  
                                     
BALANCE, December 31, 2016
  
$
43,499
    
$
(874,970
)
  
$
44,500,768
    
$
14,554,780
    
$
(324,333
)
  
$
57,899,744
  
Stock-based compensation
    
—
      
—
      
5,436
      
—
      
—
      
5,436
  
Sale of treasury stock
    
—
      
143,380
      
1,055
      
—
      
—
      
144,435
  
Net income
    
—
      
—
      
—
      
2,932,352
      
—
      
2,932,352
  
Other comprehensive income
    
—
      
—
      
—
      
—
      
518,919
      
518,919
  
BALANCE, September 30, 2017
  
$
43,499
    
$
(731,590
)
  
$
44,507,259
    
$
17,487,132
    
$
194,586
    
$
61,500,886
  

The Notes to Consolidated Financial Statements are an integral part of these statements.
 
3
CAPSTONE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Unaudited
Nine Months Ended September 30,
  
   
2017
    
2016
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net cash provided by operating activities
   $
4,168,574
     $
5,212,954
  
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchases of securities available-for-sale
  
 
(14,127,647
)
  
 
(7,614,654
)
Proceeds from sales of securities available for sale
    
—
      
1,351,381
  
Proceeds from maturities and paydowns of securities available-for-sale
    
5,521,637
      
3,452,813
  
Redemption (purchase) of restricted equity securities
    
227,100
      
(395,800
)
Net increase in loans
    
(15,827,195
)
    
(21,515,688
)
Purchases of premises and equipment
    
(116,923
)
    
(129,848
)
Net cash used in investing activities
    
(24,323,028
)
    
(24,851,796
)
CASH FLOWS FROM FINANCING ACTIVITIES
                
Net increase in deposits
    
23,413,366
      
7,683,645
  
Sale of treasury stock
    
144,435
      
11,050
  
Net (repayments) proceeds on other borrowings
    
(3,230,333
)
    
11,039,164
  
Net cash provided by financing activities
    
20,327,468
      
18,733,859
  
INCREASE IN CASH AND CASH EQUIVALENTS
    
173,014
      
(904,983
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
6,105,291
      
8,606,470
  
CASH AND CASH EQUIVALENTS AT END OF YEAR
  
$
6,278,305
    
$
7,701,487
  
 
The Notes to Consolidated Financial Statements are an integral part of these statements.
 
4
Note 1.
Basis of Presentation and Overview

Capstone Bancshares, Inc. and Subsidiary (the Bank), is a corporation organized under the laws of the State of Alabama for the purposes of owning 100% of the outstanding common stock of Capstone Bank (the Bank). The Bank is a state-chartered bank with its corporate headquarters, main office and one branch location in Tuscaloosa, Alabama and additional branch locations in Northport, McIntosh, Chatom, Jackson, Thomasville, and Fairhope, Alabama. The Bank provides a full range of banking services in its primary market areas.

Recently Issued Accounting Pronouncements

During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements for the year ended December 31, 2016 as filed with the Securities and Exchange Commission.  The following is a summary of recent authoritative pronouncements not yet effective that could impact the accounting, reporting, and/or disclosure of financial information by the Company issued since  December 31, 2016.

In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.  The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.  The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test.  The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value.  The impairment charge is limited to the amount of goodwill allocated to that reporting unit.  The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.   Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017.  The Company does not expect these amendments to have a material effect on its financial statements.

In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities.  The ASU shortens the amortization period for certain callable debt securities held at a premium.  The premium on individual callable debt securities shall be amortized to the earliest call date. This guidance does not apply to securities for which prepayments are estimated on a large number of similar loans where prepayments are probable and reasonably estimable. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted. This update should be adopted on a modified retrospective basis with a cumulative-effect adjustment to retained earnings on the date of adoption.  The Company does not expect these amendments to have a material effect on its financial statements.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (ASC) 815, Derivatives and Hedging. The goals of the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018.  The Company does not expect these amendments to have a material effect on its financial statements.

Note 2.
Securities Available for Sale
 
This note was omitted as the information it would have provided has been superseded by the subsequent event of the merger with SmartFinancial and the liquidation of the securities portfolio as detailed in Pro Forma Financial information included as Exhibit 99.3 in this filing.
 
5
Note 3.
Loans and Allowance for Loan Losses

The composition of loans by primary loan classification and by performing and impaired loan status at September 30, 2017 and December 31, 2016, are as follows:

   
September 30, 2017
  
   
Commercial,
Financial and
Agricultural
    
Real Estate
    
Consumer and
Other
    
Subtotal
    
Allowance
for Loan
Losses
    
Net Loans
  
Performing loans
  
$
92,527,069
    
$
306,941,961
    
$
18,390,326
    
$
417,859,356
    
$
3,948,780
    
$
413,910,576
  
Impaired loans
    
759,520
      
3,899,397
      
430,947
      
5,089,864
      
271,749
      
4,818,115
  
Total
  
$
93,286,589
    
$
310,841,358
    
$
18,821,273
    
$
422,949,220
    
$
4,220,529
    
$
418,728,691
  

   
December 31, 2016
  
   
Commercial,
Financial and
Agricultural
    
Real Estate
    
Consumer and
Other
    
Subtotal
    
Allowance
for Loan
Losses
    
Net Loans
  
Performing loans
  
$
91,849,964
    
$
292,252,202
    
$
19,930,784
    
$
404,032,950
    
$
3,506,232
    
$
400,526,718
  
Impaired loans
    
785,171
      
2,551,625
      
524,742
      
3,861,538
      
639,247
      
3,222,291
  
Total loans
  
$
92,635,135
    
$
294,803,827
    
$
20,455,526
    
$
407,894,488
    
$
4,145,479
    
$
403,749,009
  

The Bank evaluates all loans over 60 days past due or more for impairment.

The allocation and changes in the allowance for loan losses, by loan classification, as of and for the periods ended September 30, 2017 and December 31, 2016, are as follows:

   
September 30, 2017
  
   
Commercial, Financial
and Agricultural
    
Real Estate
    
Consumer and
Other
    
Total
  
Beginning balance
  
$
870,001
    
$
3,032,884
    
$
242,594
    
$
4,145,479
  
Loans charged off
    
(96,000
)
    
(693,000
)
    
(63,286
)
    
(852,286
)
Recoveries of loans charged off
    
—
      
31,000
      
33,836
      
64,836
  
Net Charge offs
    
(96,000
)
    
(662,000
)
    
(29,450
)
    
(787,450
)
Provision (reallocation) charged to operating expense
    
(48,256
)
    
976,941
      
(66,185
)
    
862,500
  
Ending balance
  
$
725,745
    
$
3,347,825
    
$
146,959
    
$
4,220,529
  

   
December 31, 2016
  
   
Commercial, Financial
and Agricultural
    
Real Estate
    
Consumer and
Other
    
Total
  
Beginning balance
  
$
1,197,543
    
$
2,806,664
    
$
204,932
    
$
4,209,139
  
Loans charged off
    
(395,973
)
    
(804,404
)
    
(10,096
)
    
(1,210,473
)
Recoveries of loans charged off
    
14,912
      
60,414
      
21,487
      
96,813
  
Net Charge offs
    
(381,061
)
    
(743,990
)
    
11,391
      
(1,113,660
)
Provision (reallocation) charged to operating expense
    
53,519
      
970,210
      
26,271
      
1,050,000
  
Ending balance
  
$
870,001
    
$
3,032,884
    
$
242,594
    
$
4,145,479
  
 
6
Note 3.
Loans and Allowance for Loan Losses, Continued

The level of the allowance is based upon evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, historical loss experience, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations.

In assessing the adequacy of the allowance for loan losses, management analyzes the allowance for loan losses based on the categories of commercial, financial and agricultural; real estate - construction; real estate - mortgage; and consumer and other.

Risk ratings are categorized as pass, special mention, substandard or doubtful. Management believes that the categories follow those outlined by the primary regulator. Pass rated loans include all risk rated credits other than those included in special mention, substandard and doubtful, which are defined as follows:

•
Special mention loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank's credit position at some future date.
•
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans have been placed on nonaccrual status unless it was determined that the loan should remain on accrual status.
•
Doubtful loans have all the characteristics of substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The Bank considers all doubtful loans to be impaired and places all such loans on nonaccrual status.

The following table outlines the amount of each loan classification based on internally assigned risk ratings as of September 30, 2017 and December 31, 2016:

   
September 30, 2017
  
   
Commercial, Financial
and Agricultural
    
Real Estate
    
Consumer and
Other
    
Total
  
Pass
  
$
92,458,919
    
$
300,583,950
    
$
18,257,769
    
$
411,300,638
  
Special mention
    
68,150
      
6,358,012
      
132,557
      
6,558,719
  
Substandard
    
544,712
      
3,091,284
      
105,556
      
3,741,582
  
Substandard - impaired
    
198,808
      
51,232
      
33,966
      
284,006
  
Doubtful - impaired
    
16,000
      
756,880
      
291,395
      
1,064,275
  
Total
  
$
93,286,589
    
$
310,841,358
    
$
18,821,273
    
$
422,949,220
  

   
December 31, 2016
  
   
Commercial, Financial
and Agricultural
    
Real Estate
    
Consumer and
Other
    
Total
  
Pass
  
$
91,599,663
    
$
283,372,553
    
$
19,864,984
    
$
394,837,200
  
Special mention
    
15,158
      
6,623,520
      
65,800
      
6,704,478
  
Substandard
    
235,143
      
2,256,129
      
—
      
2,491,272
  
Substandard - impaired
    
669,157
      
1,400,720
      
222,378
      
2,292,255
  
Doubtful - impaired
    
116,014
      
1,150,905
      
302,364
      
1,569,283
  
Total
  
$
92,635,135
    
$
294,803,827
    
$
20,455,526
    
$
407,894,488
  
 
7
Note 3.
Loans and Allowance for Loan Losses, Continued

The following tables detail the recorded investments, unpaid principal balance and the related allowance of impaired loans as of September 30, 2017 and December 31, 2016, and the average recorded investment of impaired loans, as well as the interest income recognized for the periods ended September 30, 2017 and December 31, 2016:
 
   
At September 30, 2017
    
For the nine months ended
September 30, 2017
  
   
Recorded
Investment
    
Unpaid
Principal
Balance
    
Related
Allowance
    
Average
Recorded
Investment
    
Interest
Income
Recognized
  
Impaired loans without a valuation allowance:
                              
Commercial, financial and agricultural
  
$
544,712
    
$
544,712
    
$
—
    
$
554,657
    
$
19,421
  
Real estate
    
3,470,645
      
3,470,645
      
—
      
4,163,179
      
104,511
  
Consumer
    
389,815
      
389,815
      
—
      
394,735
      
4,994
  
     
4,405,172
      
4,405,172
      
—
      
5,112,571
      
128,926
  
                                         
Impaired loans with a valuation allowance:
                                        
Commercial, financial and agricultural
    
214,808
      
214,808
      
138,865
      
234,596
      
9,380
  
Real estate
    
428,752
      
428,752
      
91,752
      
430,002
      
12,000
  
Consumer
    
41,132
      
41,132
      
41,132
      
44,709
      
2,454
  
     
684,692
      
684,692
      
271,749
      
709,307
      
23,834
  
Total impaired loans
  
$
5,089,864
    
$
5,089,864
    
$
271,749
    
$
2,821,878
    
$
152,760
  

   
December 31, 2016
    
For the Twelve months ended
December 31, 2016
  
   
Recorded
Investment
    
Unpaid
Principal
Balance
    
Related
Allowance
    
Average
Recorded
Investment
    
Interest
Income
Recognized
  
Impaired loans without a valuation allowance:
                              
Commercial, financial and agricultural
  
$
609,776
    
$
609,776
    
$
—
    
$
710,150
    
$
39,757
  
Real estate
    
802,767
      
802,767
      
—
      
2,515,705
      
46,241
  
Consumer
    
149,528
      
149,528
      
—
      
237,802
      
9,125
  
     
1,562,071
      
1,562,071
      
—
      
3,463,657
      
95,123
  
                                         
Impaired loans with a valuation allowance:
                                        
Commercial, financial and agricultural
    
175,395
      
175,395
      
115,177
      
146,931
      
10,564
  
Real estate
    
1,748,858
      
1,748,858
      
451,329
      
1,487,920
      
94,275
  
Consumer
    
416,089
      
375,214
      
72,741
      
190,042
      
23,834
  
     
2,340,342
      
2,299,467
      
639,247
      
1,824,893
      
128,673
  
Total impaired loans
  
$
3,902,413
    
$
3,861,538
    
$
639,247
    
$
5,288,550
    
$
223,796
  
 
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Note 3.
Loans and Allowance for Loan Losses, Continued

Past due balances and loans on nonaccrual status by loan classification are as follows:

   
September 30, 2017
  
   
30-89 Days
Past Due and
Accruing
    
Past Due 90
Days or More
and Accruing
    
Total Past
Due and
Performing
    
Loans on
Nonaccrual
Status
    
Current
Loans
    
Total
Loans
  
Commercial, financial and agricultural
  
$
127,000
    
$
—
    
$
127,000
    
$
208,349
    
$
92,951,240
    
$
93,286,589
  
Real estate
    
1,909,000
      
108,000
      
2,017,000
      
1,244,776
      
307,579,582
      
310,841,358
  
Consumer
    
139,000
      
—
      
139,000
      
315,861
      
18,366,412
      
18,821,273
  
Total
  
$
2,175,000
    
$
108,000
    
$
2,283,000
    
$
1,768,986
    
$
418,897,234
    
$
422,949,220
  

   
December 31, 2016
  
   
30-89 Days
Past Due and
Accruing
    
Past Due 90
Days or More
and Accruing
    
Total Past
Due and
Performing
    
Loans on
Nonaccrual
Status
    
Current
Loans
    
Total
Loans
  
Commercial, financial and agricultural
  
$
296,640
    
$
—
    
$
296,640
    
$
368,037
    
$
91,970,458
    
$
92,635,135
  
Real estate
    
3,015,415
      
144,172
      
3,159,587
      
1,828,798
      
289,815,442
      
294,803,827
  
Consumer
    
120,000
      
3,728
      
123,728
      
335,767
      
19,996,031
      
20,455,526
  
Total
  
$
3,432,055
    
$
147,900
    
$
3,579,955
    
$
2,532,602
    
$
401,781,931
    
$
407,894,488
  

As of September 30, 2017 and December 31, 2016, there were no loans classified as nonaccrual that were not deemed to be impaired, and all impaired loans were on nonaccruing interest status. At the date such loans were placed on nonaccrual status, the Bank reversed all previously accrued interest income against current year earnings. The Bank's policy is that once a loan is classified as impaired and placed on nonaccrual status, future payments of interest will be applied to the principal balance and not to income. There were approximately $108,000 and $148,000 in loans greater than 90 days past due and still accruing interest at September 30, 2017 and December 31, 2016, respectively.

The following table provides details for the troubled debt restructurings by loan classification:

September 30, 2017
  
Number of Contracts
    
Pre-Modification
Outstanding
Recorded
Investment
    
Post-Modification
Outstanding
Recorded
Investment
  
Consumer and other
    
—
    
$
—
    
$
—
  
Real estate - mortgage
    
2
      
126,460
      
126,460
  
Commercial, financial and agricultural
    
1
      
95,008
      
95,008
  
Total
    
3
    
$
221,468
    
$
221,468
  

There was $49,029 in troubled debt restructurings for 2017 that subsequently defaulted.
 
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Note 3.
Loans and Allowance for Loan Losses, Continued

December 31, 2016
  
Number of Contracts
    
Pre-Modification
Outstanding
Recorded
Investment
    
Post-Modification
Outstanding
Recorded
Investment
  
Consumer and other
    
1
    
$
110,328
    
$
110,328
  
Real estate - mortgage
    
3
      
378,661
      
378,661
  
Commercial, financial and agricultural
    
1
      
34,167
      
34,167
  
Total
    
5
    
$
523,156
    
$
523,156
  

There were no troubled debt restructurings for 2016 that subsequently defaulted.
 
Note 4.
Financial Instruments with Off Balance Sheet Risk

The Bank 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The outstanding notional amount of off-balance sheet risks at September 30, 2017 and December 31, 2016 is as follows:

   
2017
    
2016
  
Unused commitments and standby letters of credit
  
$
107,930,000
    
$
98,854,451
  

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
 
Note 5.
Contingencies

In the normal course of business, the Bank is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings, other than those noted above, would not have a material effect on the Bank's consolidated financial statements.

Note 6.
Fair Value Disclosures
 
This note was omitted as the information it would have provided has been superseded by the subsequent event of the merger with SmartFinancial and the fair value of the assets and liabilities in accordance with ASC 805 as detailed in the n Pro Forma Financial information included as Exhibit 99.3 in this filing.
 
 
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