10-Q 1 f2snpbs10q051418.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2018

 

[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ____________ to _____________

 

Commission file number: 000-33411

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

     

Virginia

(State or other jurisdiction of

incorporation or organization)

 

 

31-1804543

(I.R.S. Employer

Identification No.)

 
       

67 Commerce Drive

Honaker, Virginia

(Address of principal executive offices)

 

 

24260

(Zip Code)

 
         

 

 
(Registrant’s telephone number, including area code) (276) 873-7000

 

 

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X]   No [ ]

 

 
 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     
Large accelerated filer  [ ]   Accelerated filer  [ ]
Non-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 Exchange Act).

 

         
Yes [ ]   No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

     
Class   Outstanding at May 12, 2018
Common Stock, $2.00 par value   23,922,086

 
 

 

NEW PEOPLES BANKSHARES, INC.

 

INDEX

PART I FINANCIAL INFORMATION

    Page
Item 1. Financial Statements        
Consolidated Statements of Income – Three Months        
Ended March 31, 2018 and 2017 (Unaudited)     2  
         
Consolidated Statements of Comprehensive Income – Three Months        
Ended March 31, 2018 and 2017 (Unaudited)     3  
         
Consolidated Balance Sheets – March 31, 2018 (Unaudited) and December 31, 2017     4  
         
Consolidated Statements of Changes in Stockholders’ Equity -        
Three Months Ended March 31, 2018 and 2017 (Unaudited)     5  
         
Consolidated Statements of Cash Flows – Three Months        
Ended March 31, 2018 and 2017 (Unaudited)     6  
         
Notes to Consolidated Financial Statements     7  
         
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations     24  
         
Item 3. Quantitative and Qualitative Disclosures about Market Risk     30  
         
Item 4. Controls and Procedures     30  
         
PART II OTHER INFORMATION        
         
Item 1. Legal Proceedings     31  
         
Item 1A. Risk Factors     31  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     31  
         
Item 3. Defaults upon Senior Securities     31  
         
Item 4. Mine Safety Disclosures     31  
         
Item 5. Other Information     31  
         
Item 6. Exhibits     31  
         
SIGNATURES     32  

 
 

Part I Financial Information

Item 1. Financial Statements

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

         
INTEREST AND DIVIDEND INCOME   2018   2017
Loans including fees   $ 6,458     $ 5,664  
Interest-earning deposits with banks     65       43  
Investments     408       350  
Dividends on equity securities (restricted)     35       32  
Total Interest and Dividend Income     6,966       6,089  
                 
INTEREST EXPENSE                
Deposits     696       538  
Borrowed funds     192       186  
Total Interest Expense     888       724  
                 
NET INTEREST INCOME     6,078       5,365  
                 
PROVISION FOR LOAN LOSSES     63       —    
                 
NET INTEREST INCOME AFTER                
PROVISION FOR LOAN LOSSES     6,015       5,365  
                 
NONINTEREST INCOME                
Service charges and fees     1,522       1,496  
Insurance and investment fees     74       52  
Other noninterest income     154       166  
Total Noninterest Income     1,750       1,714  
                 
NONINTEREST EXPENSES                
Salaries and employee benefits     3,644       3,381  
Occupancy and equipment expense     1,292       1,127  
Data processing and telecommunications     604       553  
Other operating expenses     2,099       1,917  
Total Noninterest Expenses     7,639       6,978  
                 
INCOME BEFORE INCOME TAXES     126       101  
                 
INCOME TAX EXPENSE (BENEFIT)     46       (14 )
                 
NET INCOME   $ 80     $ 115  
                 
Income Per Share                
Basic   $ 0.00     $ 0.00  
Fully Diluted   $ 0.00     $ 0.00  
                 
Average Weighted Shares of Common Stock                
Basic     23,922,086       23,354,890  
Fully Diluted     23,922,086       23,354,890  

  

The accompanying notes are an integral part of this statement.

  2  

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(IN THOUSANDS)

(UNAUDITED)

    2018   2017
         
NET INCOME   $ 80     $ 115  
                 
Other comprehensive income (loss):                
  Investment Securities Activity                
    Unrealized gains (losses) arising during the period     (1,041 )     89  
    Tax related to unrealized gains     220       (30 )
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)     (821 )     59  
TOTAL COMPREHENSIVE INCOME (LOSS)   $ (741 )   $ 174  

 

The accompanying notes are an integral part of this statement.

  3  

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

(UNAUDITED)

 

         
ASSETS   March 31,   December 31,
    2018   2017
         
Cash and due from banks   $ 16,461     $ 18,249  
Interest-bearing deposits with banks     21,419       14,452  
Federal funds sold     136       4  
Total Cash and Cash Equivalents     38,016       32,705  
                 
Investment securities available-for-sale     67,033       71,088  
                 
Loans receivable     516,363       513,008  
Allowance for loan losses     (5,702 )     (6,196 )
Net Loans     510,661       506,812  
                 
Bank premises and equipment, net     26,387       26,115  
Other real estate owned     6,711       6,859  
Accrued interest receivable     2,033       2,036  
Deferred taxes, net     5,671       5,499  
Right-of-use assets – operating leases     5,176       5,253  
Other assets     9,882       10,333  
Total Assets   $ 671,570     $ 666,700  
                 
LIABILITIES                
                 
Deposits:                
Noninterest bearing   $ 163,241     $ 154,631  
Interest-bearing     426,706       427,913  
        Total Deposits     589,947       582,544  
                 
Borrowed funds     23,754       24,054  
Lease liabilities – operating leases     5,176       5,253  
Accrued interest payable     455       426  
Accrued expenses and other liabilities     2,006       3,450  
Total Liabilities     621,338       615,727  
                 
Commitments and contingencies                
                 
STOCKHOLDERS’ EQUITY                
                 
Common stock - $2.00 par value; 50,000,000 shares authorized;                
23,922,086 shares issued and outstanding at
March 31, 2018 and December 31, 2017
    47,844       47,844  
Additional paid-in-capital     14,570       14,570  
Retained deficit     (10,767 )     (10,847 )
Accumulated other comprehensive loss     (1,415 )     (594 )
                 
Total Stockholders’ Equity     50,232       50,973  
Total Liabilities and Stockholders’ Equity   $ 671,570     $ 666,700  

  

 

The accompanying notes are an integral part of this statement.

  4  

 


NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

    Shares of Common Stock   Common Stock  

 

Common Stock Warrants

  Additional Paid-in- Capital   Retained Earnings (Deficit)   Accum-ulated Other
Compre-hensive Income (Loss)
  Total Stockholders’ Equity
                             
Balance, December 31, 2016     23,354     $ 46,709     $ 764     $ 13,965     $ (14,065 )   $ (456 )   $ 46,917  
                                                         
Net income     —         —         —         —         115       —         115  
                                                         
Exercise of common
stock warrants
    1       2       (1 )     —         —         —         1  
                                                         
Other comprehensive income,
net of tax
    —         —         —         —         —         59       59  
Balance, March 31, 2017     23,355     $ 46,711     $ 763     $ 13,965     $ (13,950 )   $ (397 )   $ 47,092  
                                                         
Balance, December 31, 2017     23,922     $ 47,844     $ —       $ 14,570     $ (10,847 )   $ (594 )   $ 50,973  
                                                         
Net income     —         —         —         —         80       —         80  
                                                         
Other comprehensive loss,
net of tax
    —         —         —         —         —         (821 )     (821 )
Balance, March 31, 2018     23,922     $ 47,844     $ —       $ 14,570     $ (10,767 )   $ (1,415 )   $ 50,232  
                                                         

   

The accompanying notes are an integral part of this statement.

  5  

 


NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(IN THOUSANDS)

(UNAUDITED)

 

         
    2018   2017
CASH FLOWS FROM OPERATING ACTIVITIES                
Net income   $ 80     $ 115  
Adjustments to reconcile net income to net cash                
provided by operating activities:                
Provision for loan losses     63       —    
Depreciation     645       638  
Income on life insurance     (13 )     (27 )
Gain on sale of premises and equipment     (5 )     (1 )
Loss (gain) on sale of foreclosed assets     96       (24 )
Adjustment of carrying value of foreclosed real estate     69       176  
Accretion of bond premiums/discounts     169       201  
Deferred income taxes     46       —    
Net change in:                
Interest receivable     3       114  
Other assets     495       77  
Accrued interest payable     29       11  
Accrued expenses and other liabilities     (1,444 )     60  
Net Cash Provided by Operating Activities     233       1,340  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Net increase in loans     (4,668 )     (8,777 )
Purchase of securities available-for-sale     —         (6,564 )
Proceeds from principal paydowns of securities available-for-sale     2,845       4,453  
Net sale (purchase) of equity securities (restricted)     (29 )     217  
Payments for the purchase of premises and equipment     (917 )     (593 )
Proceeds from sale of premises and equipment     5       4  
Proceeds from sales of other real estate owned     739       1,154  
Net Cash Used in Investing Activities     (2,025 )     (10,106 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Exercise of common stock warrants     —         1  
Net decrease in Federal Home Loan Bank advances     (300 )     (5,300 )
Increase in deposits     7,403       18,313  
Net Cash Provided by Financing Activities     7,103       13,014  
                 
Net increase in cash and cash equivalents     5,311       4,248  
Cash and Cash Equivalents, Beginning of Period     32,705       35,448  
Cash and Cash Equivalents, End of Period   $ 38,016     $ 39,696  
                 
Supplemental Disclosure of Cash Paid During the Period for:                
     Interest   $ 859     $ 713  
     Taxes   $ —       $ —    
                 
Supplemental Disclosure of Non Cash Transactions:                
     Other real estate acquired in settlement of foreclosed loans   $ 1,023     $ 1,624  
     Loans made to finance sale of foreclosed real estate   $ 267     $ 812  
Change in unrealized loss on securities available-for-sale

  $ (1,041 )   $ 89  

 

 

The accompanying notes are an integral part of this statement.

  6  

 

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

 

New Peoples Bankshares, Inc. (“New Peoples”) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the “Bank”). The Bank is organized and incorporated under the laws of the Commonwealth of Virginia. As a state chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.

 

NOTE 2 ACCOUNTING PRINCIPLES:

 

These consolidated financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at March 31, 2018 and December 31, 2017, and the results of operations for the three-month periods ended March 31, 2018 and 2017. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

 

NOTE 3 EARNINGS PER SHARE:

 

Basic earnings per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. There were no potential common shares at March 31, 2018. For the three-months ended March 31, 2017, potential common shares consisted of 880,978 outstanding common stock warrants; however, the warrants were anti-dilutive and were not included in the calculation. Basic and diluted net income per common share calculations follows:

 

         
(Amounts in Thousands, Except
Share and Per Share Data)
  For the three months
ended March 31,
    2018   2017
Net income   $ 80     $ 115  
Weighted average shares outstanding     23,922,086       23,354,890  
Dilutive shares for stock warrants     —         —    
Weighted average dilutive shares outstanding     23,922,086       23,354,890  
                 
Basic income per share   $ 0.00     $ 0.00  
Diluted income per share   $ 0.00     $ 0.00  

 

  7  

 

NOTE 4 CAPITAL:

 

The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%. Tier 1 capital consists of common stockholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.

 

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of March 31, 2018 and December 31, 2017, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

 

    Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands) Amount Ratio Amount Ratio   Amount Ratio
March 31, 2018:
Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc. $ 68,976 15.21% $         36,273          8.0%   $      45,341 10.0%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.   63,331 13.97% 27,205 6.0%   36,273 8.0%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.   63,331 9.56% 26,505 4.0%   33,131 5.0%

Common Equity Tier 1 Capital

to Risk Weighted Assets:

New Peoples Bank, Inc.   63,331 13.97% 20,403 4.5%   29,472 6.5%
 

 

December 31, 2017:

Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc. $ 68,787 15.30%     $        35,970 8.0%   $      44,962 10.0%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.   63,160 14.05% 26,977 6.0%   35,970 8.0%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.   63,160 9.56% 26,422 4.0%   33,028 5.0%

Common Equity Tier 1 Capital

to Risk Weighted Assets:

New Peoples Bank, Inc.   63,160 14.05% 20,233 4.5%   29,225 6.5%

 

  8  

 

As of March 31, 2018, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and Common Equity Tier 1 ratios as set forth in the above tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.

 

Under Basel III Capital requirements, a capital conservation buffer of 0.625% became effective beginning on January 1, 2016. The capital conservation buffer will be gradually increased through January 1, 2019 to 2.5%. Banks will be required to maintain levels that meet the required minimum plus the capital conservation buffer in order to make distributions, such as dividends, or discretionary bonus payments.

 

NOTE 5 INVESTMENT SECURITIES:

 

The amortized cost and estimated fair value of securities (all available-for-sale (“AFS”)) are as follows:

 

                 
  Gross   Gross   Approximate
  Amortized   Unrealized   Unrealized   Fair
(Dollars are in thousands) Cost   Gains   Losses   Value
March 31, 2018
U.S. Government Agencies $ 22,912 $ 55 $ (354) $ 22,613
Taxable municipals 4,457 - (165) 4,292
Corporate bonds 5,433 103 (130) 5,406
Mortgage backed securities 36,023 1 (1,302) 34,722
Total Securities AFS $ 68,825 $ 159 $ (1,951) $ 67,033
 
December 31, 2017
U.S. Government Agencies $ 23,986 $ 79 $ (221) $ 23,844
Taxable municipals 4,466 9 (78) 4,397
Corporate bonds 5,437 168 (26) 5,579
Mortgage backed securities 37,950 3 (685) 37,268
Total Securities AFS $ 71,839 $ 259 $ (1,010) $ 71,088

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 and December 31, 2017.

                           
    Less than 12 Months   12 Months or More   Total  

 

(Dollars are in thousands)

  Fair Value  

Unrealized

Losses

 

Fair

Value

 

Unrealized

Losses

 

Fair

Value

 

Unrealized

Losses

 
March 31, 2018                          
U.S. Government Agencies $ 7,439 $ (128) $ 6,800 $ (226) $ 14,239 $ (354)  
Taxable municipals   3,545   (111)   746   (54)   4,291   (165)  
Corporate bonds   2,402   (130)   -   -   2,402   (130)  
Mtg. backed securities   14,603   (436)   20,009   (866)   34,612   (1,302)  
Total Securities AFS $ 27,989 $ (805) $ 27,555 $ (1,146) $ 55,544 $ (1,951)  
                           
December 31, 2017                          
U.S. Government Agencies $ 7,840 $ (69) $ 7,189 $ (152) $ 15,029 $ (221)  
Taxable municipals   2,403   (44)   767   (34)   3,170   (78)  
Corporate bonds   1,507   (26)   -   -   1,507   (26)  
Mtg. backed securities   14,720   (145)   21,500   (540)   36,220   (685)  
Total Securities AFS $ 26,470 $ (284) $ 29,456 $ (726) $ 55,926 $ (1,010)  
                           

  9  

 

At March 31, 2018, there were thirteen U.S. Government Agency securities, two taxable municipal securities, and fifty-nine mortgage backed securities that had been in a loss position for greater than twelve months. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost.

 

There were no sales of investment securities during the three months ended March 31, 2018 or 2017.

 

The amortized cost and fair value of investment securities at March 31, 2018, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

             
  Weighted
(Dollars are in thousands) Amortized   Fair   Average
Securities Available-for-Sale Cost   Value   Yield
Due in one year or less $ 4 $ 4   1.63%
Due after one year through five years 3,494 3,407 1.92%
Due after five years through ten years   16,042   15,802   3.20%
Due after ten years   49,285   47,820   2.31%
Total $ 68,825 $ 67,033   2.49%

 

Investment securities with a carrying value of $10.3 million and $11.0 million at March 31, 2018 and December 31, 2017, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

 

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.6 million as of March 31, 2018 and December 31, 2017.

 

NOTE 6 LOANS:

 

Loans receivable outstanding are summarized as follows:

 

         
(Dollars are in thousands)   March 31, 2018   December 31, 2017
Real estate secured:                
Commercial   $ 132,772     $ 127,688  
Construction and land development     23,358       29,763  
Residential 1-4 family     249,966       249,159  
Multifamily     14,143       15,481  
Farmland     24,803       22,998  
Total real estate loans     445,042       445,089  
Commercial     44,760       41,345  
Agriculture     3,957       3,494  
Consumer installment loans     21,952       22,411  
All other loans     652       669  
Total loans   $ 516,363     $ 513,008  

 

  10  

 

Loans receivable on nonaccrual status are summarized as follows:

 

         
         
(Dollars are in thousands)   March 31, 2018   December 31, 2017
Real estate secured:                
Commercial   $ 3,469     $ 2,035  
Construction and land development     210       470  
Residential 1-4 family     3,202       2,991  
Multifamily     85       152  
Farmland     827       800  
Total real estate loans     7,793       6,448  
Commercial     411       1,065  
Agriculture     3       3  
Consumer installment loans     20       48  
Total loans receivable on nonaccrual status   $ 8,227     $ 7,564  

 

Total interest income not recognized on nonaccrual loans for the three months ended March 31, 2018 and 2017 was $180 thousand and $363 thousand, respectively.

 

The following table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2018 and December 31, 2017:

 

             

 

 

As of March 31, 2018

(Dollars are in thousands)

 

 

 

Recorded

Investment

 

 

 

 

Unpaid Principal Balance

 

 

 

Related

Allowance

With no related allowance recorded:            
Real estate secured:            
Commercial $ 2,828 $ 2,882 $ -
Construction and land development   165   362   -
Residential 1-4 family   3,144   3,206   -
Multifamily   212   253   -
Farmland   1,165   1,191   -
Commercial   13   13   -
Agriculture   3   3   -
Consumer installment loans   -   -   -
All other loans   -   -   -
With an allowance recorded:            
Real estate secured:            
Commercial   2,047   2,047   365
Construction and land development   -   -   -
Residential 1-4 family   358   358   89
Multifamily   -   -   -
Farmland   368   368   232
Commercial   461   461   147
Agriculture   -   -   -
Consumer installment loans   8   8   2
All other loans   -   -   19
Total $ 10,772 $ 11,152 $ 854

 

  11  

 

 

 

As of December 31, 2017

(Dollars are in thousands)

 

 

 

Recorded

Investment

 

 

Unpaid Principal Balance

 

 

 

Related

Allowance

With no related allowance recorded:            
Real estate secured:            
Commercial $ 2,646 $ 2,719 $ -
Construction and land development   424   680   -
Residential 1-4 family   3,586   3,885   -
Multifamily   281   321   -
Farmland   1,264   1,664   -
Commercial   628   628   -
Agriculture   12   12   -
Consumer installment loans   8   8   -
All other loans   -   -   -
With an allowance recorded:            
Real estate secured:            
Commercial   2,503   2,622   499
Construction and land development   -   -   -
Residential 1-4 family   421   437   91
Multifamily   -   -   -
Farmland   378   378   243
Commercial   489   572   413
Agriculture   -   -   -
Consumer installment loans   -   -   -
All other loans   -   -   -
Total $ 12,640 $ 13,926 $ 1,246

 

The following table presents information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated:

 

    Three Months Ended
    March 31, 2018   March 31, 2017

 

 

(Dollars are in thousands)

 

Average

Recorded

Investment

 

Interest

Income

Recognized

 

Average

Recorded

Investment

 

Interest

Income

Recognized

With no related allowance recorded:                                
Real estate secured:                                
Commercial   $ 2,737     $ 28     $ 3,196     $ 25  
Construction and land development     295       —         5       —    
Residential 1-4 family     3,365       42       3,821       49  
Multifamily     247       4       516       12  
Farmland     1,215       12       3,884       (115 )
Commercial     321       —         —         —    
Agriculture     8       —         19       —    
Consumer installment loans     4       —         18       —    
All other loans     —         —         —         —    
With an allowance recorded:                                
Real estate secured:                                
Commercial     2,275       16       901       2  
Construction and land development     —         —         235       —    
Residential 1-4 family     390       4       701       9  
Multifamily     —         —         —         —    
Farmland     373       —        590       5  
Commercial     475       —         67       —    
Agriculture     —        —         3       —    
Consumer installment loans     4       —         5       —    
All other loans     —         —         —         —    
Total   $ 11,709     $ 106     $ 13,961     $ (13 )

  12  

 

 

An age analysis of past due loans receivable is below. At March 31, 2018 and December 31, 2017, there were no loans over 90 days past due that were accruing.

                         

 

 

 

 

 

As of March 31, 2018

(Dollars are in thousands)

 

 

 

Loans

30-59

Days

Past

Due

 

 

 

Loans

60-89

Days

Past

Due

 

 

 

Loans

90 or

More

Days

Past

Due

 

 

 

 

Total

Past

Due

Loans

 

 

 

 

 

 

Current

Loans

 

 

 

 

 

 

Total

Loans

Real estate secured:                        
Commercial $ 1,596 $ 25 $ 318 $ 1,939 $ 130,833 $ 132,772

Construction and land

development

  561   -   42   603   22,755   23,358
Residential 1-4 family   1,832   508   815   3,155   246,811   249,966
Multifamily   -   -   -   -   14,143   14,143
Farmland   1,547   245   -   1,792   23,011   24,803
Total real estate loans   5,536   778   1,175   7,489   437,553   445,042
Commercial   -   -   -   -   44,760   44,760
Agriculture   3   13   -   16   3,941   3,957

Consumer installment

Loans

  26   9   -   35   21,917   21,952
All other loans   -   -   -   -   652   652
Total loans $ 5,565 $ 800 $ 1,175 $ 7,540 $ 508,823 $ 516,363

 

                         

 

 

 

 

 

As of December 31, 2017

(Dollars are in thousands)

 

 

 

Loans

30-59

Days

Past

Due

 

 

 

Loans

60-89

Days

Past

Due

 

 

 

Loans

90 or

More

Days

Past

Due

 

 

 

 

Total

Past

Due

Loans

 

 

 

 

 

 

Current

Loans

 

 

 

 

 

 

Total

Loans

Real estate secured:                        
Commercial $ 190 $ 2,396 $ 453 $ 3,039 $ 124,649 $ 127,688

Construction and land

development

  69   246   42   357   29,406   29,763
Residential 1-4 family   3,789   378   969   5,136   244,023   249,159
Multifamily   125   89   -   214   15,267   15,481
Farmland   309   -   -   309   22,689   22,998
Total real estate loans   4,482   3,109   1,464   9,055   436,034   445,089
Commercial   103   25   603   731   40,614   41,345
Agriculture   38   -   -   38   3,456   3,494

Consumer installment

Loans

  102   15   28   145   22,266   22,411
All other loans   -   -   -   -   669   669
Total loans $ 4,725 $ 3,149 $ 2,095 $ 9,969 $ 503,039 $ 513,008

 

  13  

 

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

 

Pass - Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

 

Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances.  Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

 

Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified as Substandard, plus 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.

 

Based on the most recent analysis performed, the risk category of loans receivable was as follows:

                 

 

As of March 31, 2018

(Dollars are in thousands)

 

 

 

Pass

 

 

Special

Mention

 

 

 

Substandard

 

 

 

Total

Real estate secured:                
   Commercial $ 124,316 $ 4,489 $ 3,967 $ 132,772
   Construction and land development   22,353   781   224   23,358
   Residential 1-4 family   242,363   3,096   4,507   249,966
   Multifamily   13,792   81   270   14,143
   Farmland   21,814   1,818   1,171   24,803
Total real estate loans   424,638   10,265   10,139   445,042
Commercial   39,741   4,608   411   44,760
Agriculture   3,925   16   16   3,957
Consumer installment loans   21,930   1   21   21,952
All other loans   652   -   -   652
Total $ 490,886 $ 14,890 $ 10,587 $ 516,363

 

As of December 31, 2017

(Dollars are in thousands)

 

 

 

Pass

 

 

Special

Mention

 

 

 

Substandard

 

 

 

Total

Real estate secured:                
   Commercial $ 120,104 $ 3,228 $ 4,356 $ 127,688
   Construction and land development   28,462   816   485   29,763
   Residential 1-4 family   243,048   1,810   4,301   249,159
   Multifamily   13,695   1,445   341   15,481
   Farmland   19,273   2,445   1,280   22,998
Total real estate loans   424,582   9,744   10,763   445,089
Commercial   37,973   2,307   1,065   41,345
Agriculture   3,468   23   3   3,494
Consumer installment loans   22,357   2   52   22,411
All other loans   669   -   -   669
Total $ 489,049 $ 12,076 $ 11,883 $ 513,008

 

  14  

 

 

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended March 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

                     

As of March 31, 2018

(Dollars are in thousands)

 

Beginning

Balance

 

Charge

Offs

 

 

Recoveries

 

 

Provisions

  Ending Balance
Real estate secured:                    
Commercial $ 1,989 $ - $ 8 $ (156) $ 1,841
Construction and land development   191   (96)   -   59   154
Residential 1-4 family   2,400   (44)   29   (19)   2,366
Multifamily   106   -   -   (2)   104
Farmland   415   -   56   (48)   423
Total real estate loans   5,101   (140)   93   (166)   4,888
Commercial   660   (515)   8   426   579
Agriculture   20   -   -   6   26
Consumer installment loans   156   (26)   23   -   153
All other loans   3   -   -   17   20
Unallocated   256   -   -   (220)   36
Total $ 6,196 $ (681) $ 124 $ 63 $ 5,702

 

                         
    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of March 31, 2018

(Dollars are in thousands)

 

Individually

Evaluated

for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

 

Individually

Evaluated for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

Real estate secured:                        
Commercial $ 365 $ 1,476 $ 1,841 $ 4,875 $ 127,897 $ 132,772

Construction and land

development

  -   154   154   165   23,193   23,358
Residential 1-4 family   89   2,277   2,366   3,502   246,464   249,966
Multifamily   -   104   104   212   13,931   14,143
Farmland   232   191   423   1,533   23,270   24,803
Total real estate loans   686   4,202   4,888   10,287   434,755   445,042
Commercial   147   432   579   474   44,286   44,760
Agriculture   -   26   26   3   3,954   3,957
Consumer installment loans   2   151   153   8   21,944   21,952
All other loans   19   1   20   -   652   652
Unallocated   -   36   36   -   -   -
Total $ 854 $ 4,848 $ 5,702 $ 10,772 $ 505,591 $ 516,363

 

 

  15  

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

                     

As of December 31, 2017

(Dollars are in thousands)

 

Beginning

Balance

 

Charge

Offs

 

 

Recoveries

 

 

Provisions

  Ending Balance
Real estate secured:                    
Commercial $ 1,625 $ (179) $ 193 $ 350 $ 1,989
Construction and land development   346   (1)   -   (154)   191
Residential 1-4 family   2,376   (714)   48   690   2,400
Multifamily   241   -   -   (135)   106
Farmland   428   (49)   361   (325)   415
Total real estate loans   5,016   (943)   602   426   5,101
Commercial   163   (11)   153   355   660
Agriculture   31   (4)   5   (12)   20
Consumer installment loans   123   (147)   19   161   156
All other loans   -   -   -   3   3
Unallocated   739   -   -   (483)   256
Total $ 6,072 $ (1,105) $ 779 $ 450 $ 6,196

 

                         
    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of December 31, 2017

(Dollars are in thousands)

 

Individually

Evaluated

for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

 

Individually

Evaluated for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

Real estate secured:                        
Commercial $ 499 $ 1,490 $ 1,989 $ 5,149 $ 122,539 $ 127,688

Construction and land

development

  -   191   191   424   29,339   29,763
Residential 1-4 family   91   2,309   2,400   4,007   245,152   249,159
Multifamily   -   106   106   281   15,200   15,481
Farmland   243   172   415   1,642   21,356   22,998
Total real estate loans   833   4,268   5,101   11,503   433,586   445,089
Commercial   413   247   660   1,117   40,228   41,345
Agriculture   -   20   20   12   3,482   3,494
Consumer installment loans   -   156   156   8   22,403   22,411
All other loans   -   3   3   -   669   669
Unallocated   -   256   256   -   -   -
Total $ 1,246 $ 4,950   6,196 $ 12,640 $ 500,368 $ 513,008

 

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

  16  

 

 

NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

 

At March 31, 2018 there were $6.2 million in loans that are classified as troubled debt restructurings compared to $6.9 million at December 31, 2017. The following table presents information related to loans modified as troubled debt restructurings during the three months ended March 31, 2018 and 2017.

                       

 

 

For the three months ended

March 31, 2018

 

For the three months ended

March 31, 2017

 

Troubled Debt Restructurings

(Dollars are in thousands)

 

# of Loans

  Pre-Mod. Recorded Investment  

Post-Mod.

Recorded

Investment

 

 

# of

Loans

 

Pre-Mod.

Recorded Investment

 

Post-Mod.

Recorded

Investment

Real estate secured:                      
   Commercial - $ - $ -   1 $ 341 $ 339

Construction and land

Development

-   -   -   -   -   -
   Residential 1-4 family -   -   -   -   -   -
   Multifamily -   -   -   -   -   -
   Farmland -   -   -   -   -   -
      Total real estate loans -   -   -   1   341   339
Commercial -   -   -   -   -   -
Agriculture -   -   -   -   -   -
Consumer installment loans -   -   -   -   -   -
All other loans -   -   -   -   -   -
Total - $ - $ -   1 $ 341 $ 339
       
                       

During the three months ended March 31, 2018, the Company modified no loans for which the modification was considered to be a troubled debt restructuring. During the three months ended March 31, 2017, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate and maturity date were not modified; however, the payment terms were changed.

 

No loans modified as troubled debt restructurings defaulted during the three months ended March 31, 2018 or 2017. Generally, a troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

In determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further writedown the carrying value of the loan.

 

  17  

 

NOTE 9 OTHER REAL ESTATE OWNED:

 

The following table summarizes the activity in other real estate owned for the three months ended March 31, 2018 and the year ended December 31, 2017:

 

(Dollars are in thousands)   March 31, 2018   December 31, 2017
         
Balance, beginning of period   $ 6,859     $ 10,655  
Additions     1,023       3,087  
Transfers of premises and equipment
to other real estate
    —         125  
Proceeds from sales     (739 )     (4,742 )
Proceeds from insurance claims     —         (12 )
Loans made to finance sales     (267 )     (1,477 )
Adjustment of carrying value     (69 )     (758 )
Deferred gain from sales     —         45  
Losses from sales     (96 )     (64 )
Balance, end of period   $ 6,711     $ 6,859  


NOTE 10 FAIR VALUES:

 

The financial reporting standard, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

 

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

 

Investment Securities Available-for-Sale – Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Assets measured at fair value on a recurring basis are as follows. There were no liabilities measured at fair value on a recurring basis.

  18  

 

 

             
(Dollars are in thousands)
 
 
 
March 31, 2018
  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
Available-for-sale investments                        
    U.S. Government Agencies   $ —       $ 22,613     $ —    
    Taxable municipals     —         4,292       —    
    Corporate bonds     —         5,406       —    
    Mortgage backed securities     —         34,722       —    
Total   $ —       $ 67,033     $ —    
                         
December 31, 2017                        
Available-for-sale investments                        
    U.S. Government Agencies   $ —       $ 23,844     $ —    
    Taxable municipals     —         4,397       —    
    Corporate bonds     —         5,579       —    
    Mortgage backed securities     —         37,268       —    
Total   $ —       $ 71,088     $ —    
                         

 

Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired a specific reserve may be established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines whether or not the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or whether or not an appraised value does not include estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets.

 

Foreclosed Assets Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Foreclosed assets are carried at the lower of the carrying value or fair value.  Fair value is based upon independent observable market prices or appraised values of the collateral with a third party less an estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral if further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3.

 

Assets measured at fair value on a non-recurring basis are as follows (for purpose of this table the impaired loans are shown net of the related allowance). There were no liabilities measured at fair value on a non-recurring basis.

 

             
(Dollars are in thousands)
 
 
 
March 31, 2018
  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
Other real estate owned   $ —       $ —       $ 6,711  
Impaired loans     —         —         9,918  
Total   $ —       $ —       $ 16,629  
                         
December 31, 2017                        
Other real estate owned   $ —       $ —       $ 6,859  
Impaired loans     —         —         11,394  
Total   $ —       $ —       $ 18,253  
                         

 

  19  

 

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis, the significant unobservable inputs used in the fair value measurements were as follows:

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

 

(Dollars in thousands)

 

Fair Value at March 31,

2018

 

 

 

Valuation Technique

 

 

 

Significant Unobservable Inputs

  General Range of Significant Unobservable Input Values
Impaired Loans $ 9,918   Appraised Value/Discounted Cash Flows/Market Value of Note   Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell   0 – 18%
                 
Other Real Estate Owned   6,711   Appraised Value/Comparable Sales/Other Estimates from Independent Sources   Discounts to reflect current market conditions and estimated costs to sell   0 – 18%

 

Fair Value of Financial Instruments

 

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

 

The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

 

The tables below present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits with banks, deposits with no stated maturities, and accrued interest approximates fair value.

 

During the first quarter of 2018, the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.” The amendments included within this standard, which are applied prospectively, require the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using an exit price notion. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.

 

As of March 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio.

 

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

  20  

 

 

As of December 31, 2017, the fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December 31, 2017.

 

The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments.

 

                     
            Fair Value Measurements

 

 

 

 

(Dollars are in thousands)

 

 

 

 

Carrying

Amount

 

 

 

 

Fair

Value

 

Quoted market price in active markets

(Level 1)

 

Significant other observable inputs

(Level 2)

 

 

Significant unobservable inputs

(Level 3)

                     
March 31, 2018                    
Financial Instruments – Assets                    
   Net Loans $ 510,661 $ 499,763 $ - $ 489,845 $ 9,918
                     
Financial Instruments – Liabilities                    
   Time Deposits   265,025   264,945   -   264,945   -
   FHLB Advances   7,258   7,557   -   7,557   -
   Trust Preferred Securities   16,496   13,575   -   13,575   -
                     
December 31, 2017                    
Financial Instruments – Assets                    
   Net Loans $ 506,812 $ 506,608 $ - $ 495,214 $ 11,394
                     
Financial Instruments – Liabilities                    
   Time Deposits   272,330   272,352   -   272,352   -
   FHLB Advances   7,558   7,794   -   7,794   -
   Trust Preferred Securities   16,496   16,496   -   16,496    
                    -

NOTE 11 SALE AND LEASEBACK TRANSACTIONS:

 

On May 31, 2017 the Bank, the wholly-owned subsidiary of the Company, sold four (4) of its properties, one each located in Abingdon, Bristol, Gate City and Castlewood, Virginia to a nonaffiliated third party for a total purchase price of $6.2 million. After selling expenses of $192 thousand, the net proceeds on the transactions were $6.0 million. The sales prices for the properties were based on outside appraisals obtained by the Bank. The Bank provided $4.9 million of financing to the purchaser for a term of 10 years for this transaction.

 

In connection with the sale of the four properties, the Bank on May 31, 2017 entered into commercial lease agreements with the purchaser for the properties (the “Leases”), which will allow the Bank to continue to service customers from these locations. The Leases, which commenced on June 1, 2017, provide the Bank with use of the properties for an initial term of fifteen (15) years. Base rent payments for years 1 through 5 of the Leases are approximately $417 thousand a year. The base rent payments will increase by 8% for years 6 through 10 of the Leases and then by another 8% for years 11 through 15 of the Leases. The Bank has the option to renew the Leases five (5) times and each renewal would be for a term of five (5) years. The base rent for the renewals would be negotiated at the time the renewal option is exercised by the Bank. While the cash lease payments are currently $417 thousand a year, the Company is required to straight-line the expense over the initial term of fifteen (15) years. As a result, the annual lease expense will be approximately $451 thousand. The weighted average remaining life of the leases is 14.17 years.

  21  

 

 

In anticipation of this transaction the Company adopted ASU No. 2016-02 Leases (Topic 842) early. This ASU revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. As a result of this transaction the Company recognized initial right-to-use assets – operating leases of approximately $5.3 million, along with corresponding lease liabilities of approximately $5.3 million. The $5.3 million was determined by calculating the present value of the annual cash lease payments using a discount rate of 3.25%. The 3.25% discount rate was determined to be our fifteen (15) year incremental borrowing rate as of May 31, 2017.

 

As a result of the sale and the determination that the corresponding leases were operating leases, the Company also recognized a gain in 2017 of $2.6 million on the sale and leaseback transactions.

 

NOTE 12 NONINTEREST EXPENSES:

 

Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:

 

(Dollars are in thousands)   March 31, 2018   March 31, 2017
         
Advertising   $ 126     $ 93  
ATM network expense     392       403  
Legal and professional fees     367       297  
Loan related expenses     200       184  
Printing and supplies     136       24  
FDIC insurance premiums     96       102  
Other real estate owned, net     247       300  
Other     535       514  
Total noninterest expenses   $ 2,099     $ 1,917  

 

NOTE 13 SUBSEQUENT EVENTS:

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

 

NOTE 14 RECENT ACCOUNTING DEVELOPMENTS:

 

The following is a summary of recent authoritative announcements:

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance became effective January 1, 2018. The amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, and therefore had no material effect on our consolidated financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification (“ASC”), to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments became effective on January 1, 2018 and did not have a material effect on the financial statements. As discussed in Note 10, the Company measured the fair value of its loan portfolio using an exit price notion as of March 31, 2018.

 

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As discussed in Note 11, the Company early adopted ASU No. 2016-02 Leases (Topic 842).

  22  

 

 

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams and a review of related contracts potentially affected by the ASU and, based on this assessment, the Company concluded that the ASU did not materially change the method in which the Company currently recognizes revenue for these revenue streams. As such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

 

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.

 

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

 

In February 2017, the FASB amended the Other Income Topic of the ASC to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.

 

In September 2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the Accounting Standards Codification. The amendments incorporate into the ASC recent SEC guidance about certain public business entities (PBEs) electing to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue and leases. The amendments were effective upon issuance. The Company is currently in the process of evaluating the impact of adoption of this guidance, however it does not expect these amendments to have a material effect on its financial statements.

 

In November 2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topics of the Accounting Standards Codification. The amendments incorporate into the ASC recent SEC guidance related to revenue recognition. The amendments were effective upon issuance and did not have a material effect on the financial statements.

 

In February 2018, the FASB Issued (ASU 2018-02), Income Statement (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application to each period (or periods) in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings was $98 thousand as of December 31, 2017.

 

In February 2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments will be effective for the third quarter of 2018 subsequent to adopting the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2018, the FASB updated the Debt Securities and the Regulated Operations Topics of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2018, the FASB updated the Income Taxes Topic of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

  23  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Caution About Forward Looking Statements

 

We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, business strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

 

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.

 

Critical Accounting Policies

 

For discussion of our significant accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2017. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and related valuation allowance.

 

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.

 

Our deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized in the foreseeable future, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.

 

Overview and Highlights

 

For the quarter ended March 31, 2018 the Company had net income of $80 thousand, or basic net income per share of $0.00, as compared to a net income of $115 thousand, or basic net income per share of $0.00, for the quarter ended March 31, 2017. Total assets increased $4.9 million from December 31, 2017 at $666.7 million to $671.6 million at March 31, 2018.

 

  24  

 

Highlights from the first quarter of 2018 include:

· Interest-bearing deposits with banks increased $7.0 million, or 48.2%;
· Investment securities available-for-sale decreased 5.7%, or $4.1 million;
· Net loans increased $3.8 million;
· Total assets increased $4.9 million;
· Noninterest-bearing deposits increased $8.6 million, or 5.6%;
· Interest-bearing deposits decreased $1.2 million;
· The Bank continues to be considered well-capitalized under regulatory standards; and,
· Book value per share was $2.10 as of March 31, 2018.

 

Comparison of the Three Months ended March 31, 2018 to March 31, 2017

 

Interest income increased $877 thousand, or 14.4%, for the first three months of 2018 compared to the first three months of 2017. Substantially all of the increase was related to interest and fees earned on loans. Interest paid for deposit accounts in the first quarter of 2018 was $158 thousand higher than the prior year contributing to the overall $164 thousand increase to interest expenses for the quarter. These increases resulted in an increase to net interest income of $713 thousand. In the first quarter of 2018, our net interest margin was 4.09%, as compared to 3.85% for the same period in 2017, an increase of 24 basis points.

 

Noninterest income for the first quarter of 2018 was $1.8 million, an increase of $36 thousand when compared to $1.7 million for the same period in 2017. Service charges and fees increased $26 thousand during the first quarter of 2018 compared to the first quarter of 2017 due principally to Interactive Teller Machine (“ITM”) and ATM network fee revenue which increased $36 thousand year over year.

Noninterest expense increased $661 thousand, or 9.47%, to $7.6 million for the first quarter 2018 as compared to $7.0 million for the first quarter of 2017. Salaries and employee benefits increased $263 thousand, or 7.78% in the quarter-to-quarter comparison, from $3.4 million at March 31, 2017 to $3.6 million for the same period in 2018. This increase was primarily the result of seasoned commercial bankers and credit administration staff hired throughout 2017 as a part of our strategy to grow the loan portfolio, staffing for a new branch location that opened in the second quarter of 2018 in Princeton, West Virgina, , annual pay increases, and increased health insurance costs.

Occupancy and equipment expenses increased $165 thousand from $1.1 million for the first quarter of 2017 to $1.3 million for the first quarter of 2018. In the second quarter of 2017, the Bank sold four commercial properties and then entered into commercial lease agreements resulting in an increase to lease expense of $119 thousand for the three months ended March 31, 2018 compared to March 31, 2017. Building depreciation expense decreased $32 thousand while maintenance and equipment depreciation expenses increased $17 thousand and $36 thousand, respectively. Data processing and telecommunications expenses increased $51 thousand. Other real estate owned expenses decreased $53 thousand to $247 thousand for the first quarter of 2018 as compared to $300 thousand for the same period in 2017. Writedowns on other real estate owned were $69 thousand for the first three months of 2018 as compared to writedowns of $176 thousand for the same period in 2017. During the first three months of 2018, we had net losses on the sale of other real estate owned of $96 thousand as compared to net gains on the sale of other real estate owned of $24 for the same period in 2017, as we continue to actively pursue the reduction of OREO and redeploy the funds received in earning assets. Legal and professional fees increased $70 thousand due principally to an increase in legal fees of $63 thousand related to efforts to resolve various litigation issues incurred in the normal course of business.

 

Our efficiency ratio, a non-GAAP measure which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 97.59% for the first quarter of 2018 as compared to 98.57% for the same period in 2017. Included in this calculation are the other real estate owned write-downs which negatively impact the ratio.

 

Balance Sheet

 

Total assets increased $4.9 million, or 0.73%, to $671.6 million at March 31, 2018 from $666.7 million at December 31, 2017. The main driver in the increase is related to an increase of $3.4 million in loans resulting from our efforts to conservatively grow the loan portfolio. Going forward, we anticipate total assets increasing due to our plan to conservatively and prudently grow the loan portfolio, as we were able to accomplish in the first quarter of 2018.

  25  

 

Total investments decreased $4.1 million, or 5.70%, to $67.0 million at March 31, 2018 from $71.1 million at December 31, 2017. Due to rising interest rates, a $1.0 million decrease in the fair market value of the investment portfolio during the 1st quarter of 2018 resulted in a net unrealized loss of $1.8 million at March 31, 2018 compared to the net unrealized loss of $751 thousand at December 31, 2017. Interest bearing deposits with banks increased $7.0 million, or 48.21%, in the first three months of 2018 to $21.4 million from $14.4 million at December 31, 2017 as liquid assets were increased to support loan demand.

 

Total loans increased $3.4 million to $516.4 million at March 31, 2018 as compared to $513.0 million at December 31, 2017. We believe the focus on developing new and existing lending relationships should continue the pace of increasing total loans as experienced in the first three months of 2018, subject to the economy and heightened competition in our markets.

 

In May 2017, the Company early adopted ASU No. 2016-02 Leases (Topic 842) which resulted in the recognition of right-of-use assets – operating leases and corresponding lease liabilities. During the first quarter of 2018, both the right-of-use assets and the liabilities decreased $77 thousand.

 

Total deposits increased $7.4 million, or 1.27%, from $582.5 million at December 31, 2017 to $589.9 million at March 31, 2018. Noninterest-bearing demand deposits increased 5.57%, or $8.6 million, from $154.6 million at December 31, 2017 to $163.2 million at March 31, 2018. Interest-bearing deposits decreased $1.2 million over the same period as we seek to manage the composition of the deposit portfolio and reduce reliance on time deposits. Due to competitive pressures, rising interest rates, and our need for funding, we expect to see an uptick on the interest we pay on time deposits in 2018. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.

 

At March 31, 2018, we had borrowings from the Federal Home Loan Bank (“FHLB”) totaling $7.3 million as compared to $7.6 million at December 31, 2017, a decrease of $300 thousand in regularly scheduled principal payments. None of the FHLB advances are overnight borrowings and therefore the advances are not subject to daily interest rate changes.

 

The following table presents the FHLB advances:

 

(Dollars in thousands)   Maturity Date   Rate   March 31, 2018   December 31, 2017
Principal Reducing Credit   5/16/2018   4.10% $ 83 $ 208
Principal Reducing Credit   5/21/2018   4.05%   175   350
Fixed Rate Hybrid   6/28/2019   0.99%   2,000   2,000
Fixed Rate Hybrid   6/30/2021   1.34%   5,000