10-Q 1 npbs10q110917.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 September 30, 2017

 

[ ] 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 November 13, 2017
Common Stock, $2.00 par value   23,819,148

 

   

 

NEW PEOPLES BANKSHARES, INC.

 

INDEX

 

    Page
PART I  FINANCIAL INFORMATION  
Item 1.   Financial Statements  
Consolidated Statements of Income – Nine Months  
Ended September 30, 2017 and 2016 (Unaudited) 2
     
Consolidated Statements of Income – Three Months  
Ended September 30, 2017 and 2016 (Unaudited) 3
     
Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months  
Ended September 30, 2017 and 2016 (Unaudited) 4
     
Consolidated Balance Sheets – September 30, 2017 (Unaudited) and December 31, 2016 5
     
Consolidated Statements of Changes in Stockholders’ Equity -  
Nine Months Ended September 30, 2017 and 2016 (Unaudited) 6
     
Consolidated Statements of Cash Flows – Nine Months  
Ended September 30, 2017 and 2016 (Unaudited) 7
     
Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
     
Item 4. Controls and Procedures 31
     
PART II OTHER INFORMATION   32
     
Item 1. Legal Proceedings 32
     
Item 1A. Risk Factors   32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 3. Defaults upon Senior Securities 32
     
Item 4. Mine Safety Disclosures 32
     
Item 5. Other Information 32
     
Item 6. Exhibits 32
     
SIGNATURES   33

 

 
 

Part I Financial Information

Item 1 Financial Statements

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

         
INTEREST AND DIVIDEND INCOME   2017   2016
Loans including fees   $ 17,902     $ 16,910  
Federal funds sold     1       —    
Interest-earning deposits with banks     150       67  
Investments     1,122       1,161  
Dividends on equity securities (restricted)     105       99  
Total Interest and Dividend Income     19,280       18,237  
                 
INTEREST EXPENSE                
Deposits                
  Demand     36       37  
  Savings     137       122  
  Time deposits     1,618       1,288  
FHLB advances     117       109  
Federal funds purchased     —         2  
Trust preferred securities     437       373  
Total Interest Expense     2,345       1,931  
                 
NET INTEREST INCOME     16,935       16,306  
                 
PROVISION FOR LOAN LOSSES     —         (500 )
                 
NET INTEREST INCOME AFTER                
PROVISION FOR LOAN LOSSES     16,935       16,806  
                 
NONINTEREST INCOME                
Gain on sale and leaseback transactions     2,619       —    
Service charges     2,655       1,926  
Fees, commissions and other income     2,429       2,694  
Insurance and investment fees     146       404  
Net realized gains on sale of investment securities     —         240  
Life insurance investment income     82       118  
Total Noninterest Income     7,931       5,382  
                 
NONINTEREST EXPENSES                
Salaries and employee benefits     10,135       9,954  
Occupancy and equipment expense     3,376       3,042  
Lease expense – operating leases     150       —    
Advertising and public relations     257       332  
Data processing and telecommunications     1,853       1,726  
FDIC insurance premiums     298       407  
Other real estate owned and repossessed vehicles, net     1,280       599  
Other operating expenses     4,350       4,208  
Total Noninterest Expenses     21,699       20,268  
                 
INCOME BEFORE INCOME TAXES     3,167       1,920  
                 
INCOME TAX BENEFIT     (9 )     (6 )
                 
NET INCOME   $ 3,176     $ 1,926  
                 
Income Per Share                
Basic   $ 0.14     $ 0.08  
Fully Diluted   $ 0.14     $ 0.08  
                 
Average Weighted Shares of Common Stock                
Basic     23,355,611       23,354,092  
Fully Diluted     23,355,611       23,354,092  

The accompanying notes are an integral part of this statement.

  2  

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

         
         
INTEREST AND DIVIDEND INCOME   2017   2016
Loans including fees   $ 6,123     $ 5,732  
Federal funds sold     1       —    
Interest-earning deposits with banks     58       23  
Investments     391       334  
Dividends on equity securities (restricted)     39       35  
Total Interest and Dividend Income     6,612       6,124  
                 
INTEREST EXPENSE                
Deposits                
  Demand     11       13  
  Savings     44       44  
  Time deposits     591       441  
FHLB Advances     33       45  
Trust Preferred Securities     154       128  
Total Interest Expense     833       671  
                 
NET INTEREST INCOME     5,779       5,453  
                 
PROVISION FOR LOAN LOSSES     —         —    
                 
NET INTEREST INCOME AFTER                
PROVISION FOR LOAN LOSSES     5,779       5,453  
                 
NONINTEREST INCOME                
Service charges     934       854  
Fees, commissions and other income     807       1,031  
Insurance and investment fees     40       103  
Life insurance investment income     27       55  
Total Noninterest Income     1,808       2,043  
                 
NONINTEREST EXPENSES                
Salaries and employee benefits     3,413       3,405  
Occupancy and equipment expense     1,115       1,121  
Lease expense – operating leases     112       —    
Advertising and public relations     83       99  
Data processing and telecommunications     630       569  
FDIC insurance premiums     86       137  
Other real estate owned and repossessed vehicles, net     227       347  
Other operating expenses     1,432       1,477  
Total Noninterest Expenses     7,098       7,155  
                 
INCOME BEFORE INCOME TAXES     489       341  
                 
INCOME TAX EXPENSE (BENEFIT)     5       (5 )
                 
NET INCOME   $ 484     $ 346  
                 
Income Per Share                
Basic   $ 0.02     $ 0.01  
Fully Diluted   $ 0.02     $ 0.01  
                 
Weighted Average Shares of Common Stock                
Basic     23,355,580       23,354,111  
Fully Diluted     23,355,580       23,354,111  

 

The accompanying notes are an integral part of this statement.

  3  

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

 

                 
                 
   

For the three months ended

September 30,

 

For the nine months ended

September 30,

    2017   2016   2017   2016
                 
NET INCOME   $ 484     $ 346     $ 3,176     $ 1,926  
                                 
Other comprehensive income (loss):                                
  Investment Securities Activity                                
    Unrealized gains (losses) arising during the period     (216 )     (70 )     391       1,409  
    Tax related to unrealized gains (losses)     73       24       (133 )     (479 )
    Reclassification of realized gains during the period     —         —         —         (240 )
    Tax related to realized gains     —         —         —         82  
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)     (143 )     (46 )     258       772  
TOTAL COMPREHENSIVE INCOME   $ 341     $ 300     $ 3,434     $ 2,698  

 

The accompanying notes are an integral part of this statement.

  4  

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

         
ASSETS   September 30,   December 31,
    2017   2016
      (Unaudited)       (Audited)  
                 
Cash and due from banks   $ 16,559     $ 18,500  
Interest-bearing deposits with banks     20,808       16,816  
Federal funds sold     8       132  
Total Cash and Cash Equivalents     37,375       35,448  
                 
Investment securities available-for-sale     68,231       70,011  
                 
Loans receivable     501,390       468,629  
Allowance for loan losses     (6,086 )     (6,072 )
Net Loans     495,304       462,557  
                 
Bank premises and equipment, net     26,454       29,985  
Equity securities (restricted)     2,570       2,802  
Other real estate owned     7,506       10,655  
Accrued interest receivable     1,956       1,848  
Life insurance investments     12,356       12,274  
Deferred taxes, net     5,152       5,285  
Right-of-use assets – operating leases     5,252       —    
Other assets     3,080       3,470  
                 
        Total Assets   $ 665,236     $ 634,335  
                 
LIABILITIES                
                 
Deposits:                
Demand deposits:                
Noninterest bearing   $ 159,475     $ 151,914  
Interest-bearing     33,770       40,213  
Savings deposits     121,088       114,492  
Time deposits     267,283       247,819  
        Total Deposits     581,616       554,438  
                 
Federal Home Loan Bank advances     7,858       13,758  
Lease liabilities – operating leases     5,252       —    
Accrued interest payable     394       331  
Accrued expenses and other liabilities     3,265       2,395  
Trust preferred securities     16,496       16,496  
                 
Total Liabilities     614,881       587,418  
                 
Commitments and contingencies                
                 
STOCKHOLDERS’ EQUITY                
                 
Common stock - $2.00 par value; 50,000,000 shares authorized;                

23,356,632 and 23,354,457 shares issued and outstanding at

September 30, 2017 and December 31, 2016, respectively

    46,714       46,709  
Common stock warrants     762       764  
Additional paid-in-capital     13,966       13,965  
Retained deficit     (10,889 )     (14,065 )
Accumulated other comprehensive loss     (198 )     (456 )
                 
Total Stockholders’ Equity     50,355       46,917  
                 
Total Liabilities and Stockholders’ Equity   $ 665,236     $ 634,335  

  

 

The accompanying notes are an integral part of this statement.

  5  

 


NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

    Shares of Common Stock   Common Stock  

 

 

 

 

 

Common Stock Warrants

  Additional Paid-in- Capital   Retained  Deficit  

Accum-ulated Other

Compre-hensive Income (Loss)

  Total Stockholders’ Equity
                             
Balance, December 31, 2015     23,354     $ 46,708     $ 764     $ 13,965     $ (15,023 )   $ (327 )   $ 46,087  
                                                         
Net income     —         —         —         —         1,926       —         1,926  

Other comprehensive income,

net of tax

    —         —         —         —         —         772       772  
Balance, September 30, 2016*     23,354     $ 46,708     $ 764     $ 13,965     $ (13,097 )   $ 445     $ 48,785  
                                                         
Balance, December 31, 2016     23,354     $ 46,709     $ 764     $ 13,965     $ (14,065 )   $ (456 )   $ 46,917  
                                                         
Net income     —         —         —         —         3,176       —         3,176  
                                                         

Exercise of common

stock warrants

    3       5       (2 )     1       —         —         4  
                                                         

Other comprehensive income,

net of tax

    —         —         —         —         —         258       258  
Balance, September 30, 2017     23,357     $ 46,714     $ 762     $ 13,966     $ (10,889 )   $ (198 )   $ 50,355  
                                                         

 

 

*During the third quarter of 2016, 175 shares of common stock were issued in connection with common stock warrants being exercised.

 

The accompanying notes are an integral part of this statement.

  6  

 


NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

         
    2017   2016
CASH FLOWS FROM OPERATING ACTIVITIES                
Net income   $ 3,176     $ 1,926  
Adjustments to reconcile net income to net cash                
provided by operating activities:                
Depreciation     1,911       1,815  
Provision for loan losses     —         (500 )
Income on life insurance     (82 )     (118 )
Gain on sale of securities available-for-sale     —         (240 )
Gain on sale and leaseback transactions     (2,619 )     —    
Gain on sale of premises and equipment     (2 )     (67 )
(Gain) loss on sale of foreclosed assets     29       (290 )
Adjustment of carrying value of foreclosed real estate     668       165  
Accretion of bond premiums/discounts     589       711  
Deferred tax benefit     —         (95 )
Net change in:                
Interest receivable     (108 )     (108 )
Other assets     390       (1,261 )
Accrued interest payable     63       6  
Accrued expenses and other liabilities     826       668  
Net Cash Provided by Operating Activities     4,841       2,612  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Net increase in loans     (29,348 )     (27,362 )
Purchase of securities available-for-sale     (13,032 )     (9,708 )
Proceeds from sales and maturities of securities available-for-sale     14,614       37,487  
Net sale (purchase) of equity securities (restricted)     232       (172 )
Payments for the purchase of premises and equipment     (1,866 )     (4,469 )
Proceeds from sales and leaseback transactions     1,042       —    
Proceeds from sale of premises and equipment     5       735  
Proceeds from insurance claims on other real estate owned     12       —    
Proceeds from sales of other real estate owned     4,145       2,379  
Net Cash Used In Investing Activities     (24,196 )     (1,110 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Exercise of common stock warrants     4       —    
Net increase (decrease) in Federal Home Loan Bank advances     (5,900 )     6,100  
Net change in:                
Demand deposits     1,118       13,588  
Savings deposits     6,596       (6,069 )
Time deposits     19,464       (9,022 )
Net Cash Provided by Financing Activities     21,282       4,597  
                 
Net increase in cash and cash equivalents     1,927       6,099  
Cash and Cash Equivalents, Beginning of Period     35,448       26,338  
Cash and Cash Equivalents, End of Period   $ 37,375     $ 32,437  
                 
Supplemental Disclosure of Cash Paid During the Period for:                
     Interest   $ 2,282     $ 1,925  
     Taxes   $ —       $ 95  
                 
Supplemental Disclosure of Non Cash Transactions:                
     Right-of-use assets obtained in exchange for new operating lease liabilities   $ 5,252     $ —    
     Loan made to finance sale of premises and equipment   $ 4,935     $ —    
     Other real estate acquired in settlement of foreclosed loans   $ 2,761     $ 3,851  
     Loans made to finance sale of foreclosed real estate   $ 1,225     $ 676  
     Transfer of premises and equipment to other real estate   $ 125     $ —    
     Transfer of other real estate to premises and equipment   $ —       $ 125  
     Change in unrealized gains (losses) on securities available-for-sale   $ 391     $ 1,169  

The accompanying notes are an integral part of this statement.

  7  

 


NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

 

New Peoples Bankshares, Inc. (“The Company”) is a financial holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (“Bank”) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. 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 southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly-owned subsidiaries; NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004 the Company established NPB Capital Trust I for the purpose of issuing trust preferred securities. On September 27, 2006, the Company established NPB Capital Trust 2 for the purpose of issuing additional trust preferred securities. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank. In June 2012 the name of NPB Financial Services, Inc. was changed to NPB Insurance Services, Inc. which operates solely as an insurance agency. On March 4, 2016 the Federal Reserve Bank of Richmond approved the Company’s election to become a financial holding company. In July 2016, the Bank and its wholly-owned subsidiary NPB Insurance Services, Inc. announced that it was forming a business relationship with The Hilb Group of Virginia dba CSE Insurance Services, a division of the Hilb Group, LLC (“CSE”), located in Abingdon, Virginia, to provide insurance services for its current and future customers. Effective July 1, 2016, NPB Insurance Services, Inc. sold its existing book of business to CSE. These customers are now serviced by CSE and the Bank refers future insurance needs of its customers to CSE. On June 7, 2017, NPB Insurance Services, Inc. purchased a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.

 

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 September 30, 2017 and December 31, 2016, and the results of operations for the three and nine month periods ended September 30, 2017 and 2016. 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, 2016. The results of operations for the three and nine month periods ended September 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year.

 

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.

  8  

 

 

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. Potential common shares that may be issued related to outstanding common stock warrants are determined by the Treasury method. For the three and nine months ended September 30, 2017 and 2016, potential common shares of 879,803 and 882,178, respectively, 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 September 30,
  For the nine months
ended September 30,
    2017   2016   2017   2016
Net income   $ 484     $ 346     $ 3,176     $ 1,926  
Weighted average shares outstanding     23,355,580       23,354,111       23,355,611       23,354,092  
Dilutive shares for stock options and warrants     —         —         —         —    
Weighted average dilutive shares outstanding     23,355,580       23,354,111       23,355,611       23,354,092  
                                 
Basic and diluted income per share   $ 0.02     $ 0.01     $ 0.14     $ 0.08  

 

NOTE 4 CAPITAL:

 

Capital Requirements and Ratios

 

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 amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), Tier 1 capital (as defined) to average assets (as defined), and Common Equity Tier 1 capital (as defined) to risk-weighted assets (as defined). As of September 30, 2017, the Bank meets all capital adequacy requirements to which it is subject.

 

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 September 30, 2017 and December 31, 2016, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

  9  

 

 

                         
    Actual   Minimum Capital Requirement   Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)   Amount   Ratio   Amount   Ratio   Amount   Ratio
September 30, 2017:
Total Capital to Risk Weighted Assets:                                                
New Peoples Bank, Inc.     70,084       15.96 %   $ 35,119       8.0 %   $ 43,899       10.0 %
Tier 1 Capital to Risk Weighted Assets:                                                
New Peoples Bank, Inc.     64,590       14.71 %     26,339       6.0 %     35,119       8.0 %
Tier 1 Capital to Average Assets:                                                
New Peoples Bank, Inc.     64,590       9.84 %     26,249       4.0 %     32,811       5.0 %

Common Equity Tier 1 Capital

to Risk Weighted Assets:

                                               
New Peoples Bank, Inc.     64,590       14.71 %     19,754       4.5 %     28,534       6.5 %
                                                 

 

December 31, 2016:

                                               
Total Capital to Risk Weighted Assets:                                                
New Peoples Bank, Inc.     67,549       16.64 %   $ 32,476       8.0 %   $ 40,595       10.0 %
Tier 1 Capital to Risk Weighted Assets:                                                
New Peoples Bank, Inc.     62,462       15.39 %     24,357       6.0 %     32,476       8.0 %
Tier 1 Capital to Average Assets:                                                
New Peoples Bank, Inc.     62,462       9.93 %     25,149       4.0 %     31,436       5.0 %

Common Equity Tier 1 Capital

to Risk Weighted Assets:

                                               
New Peoples Bank, Inc.     62,462       15.39 %     18,268       4.5 %     26,386       6.5 %

 

As of September 30, 2017, 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 is 1.25% as of September 30, 2017 and the Bank met that requirement with a buffer of 7.96%. The capital conservation buffer will be gradually increased through January 1, 2019 to 2.50%. 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.

  10  

 

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
September 30, 2017
U.S. Government Agencies $ 24,363 $ 103 $ 155 $ 24,311
Taxable municipals 2,318 7 32 2,293
Corporate bonds 3,906 191 - 4,097
Mortgage backed securities 37,944 23 437 37,530
Total Securities AFS $ 68,531 $ 324 $ 624 $ 68,231
 
December 31, 2016
U.S. Government Agencies $ 24,821 $ 80 $ 269 $ 24,632
Taxable municipals 2,340 2 50 2,292
Corporate bonds 3,600 149 - 3,749
Mortgage backed securities 39,941 25 628 39,338
Total Securities AFS $ 70,702 $ 256 $ 947 $ 70,011

 

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 September 30, 2017 and December 31, 2016.

 

                         
    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

September 30, 2017                        
U.S. Government Agencies   $ 12,043     $ 134     $ 1,681     $ 21     $ 13,724     $ 155  
Taxable municipals     1,055       28       262       4       1,317       32  
Corporate bonds     —         —         —         —         —         —    
Mtg. backed securities     21,749       230       9,980       207       31,729       437  
Total Securities AFS   $ 34,847     $ 392     $ 11,923     $ 232     $ 46,770     $ 624  
                                                 
December 31, 2016                                                
U.S. Government Agencies   $ 12,081     $ 250     $ 2,449     $ 19     $ 14,530     $ 269  
Taxable municipals     1,561       50       —         —         1,561       50  
Corporate bonds     500       —         —         —         500       —    
Mtg. backed securities     28,680       543       4,655       85       33,335       628  
Total Securities AFS   $ 42,822     $ 843     $ 7,104     $ 104     $ 49,926     $ 947  
                                                 

At September 30, 2017, the available-for-sale portfolio included 107 investments for which the fair market value was less than amortized cost. At December 31, 2016, the available-for-sale portfolio included 107 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had an other-than-temporary impairment.

  11  

 

 

Investment securities with a carrying value of $10.6 million and $11.3 million at September 30, 2017 and December 31, 2016, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

 

Gross proceeds on the sale of investment securities were $3.2 million and $24.8 million, respectively, for the nine months ended September 30, 2017 and 2016. Gross realized gains and losses pertaining to the sale of investment securities available for sale are detailed as follows:

 

                 
    For the three months
ended September 30,
  For the nine months
ended September 30,
(Dollars are in thousands)   2017   2016   2017   2016
Gross gains realized   $ 30     $ —       $ 30     $ 275  
Gross losses realized     (30 )     —         (30 )     (35 )
Net realized gains   $ —       $ —       $ —       $ 240  

 

The amortized cost and fair value of investment securities at September 30, 2017, 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 $ 11 $ 11   1.57%
Due after one year through five years 3,636 3,622 2.03%
Due after five years through ten years   14,853   14,977   3.03%
Due after ten years   50,031   49,621   2.14%
Total $ 68,531 $ 68,231   2.32%

 

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 and $2.8 million as of September 30, 2017 and December 31, 2016, respectively.

 

  12  

 

NOTE 6 LOANS:

 

Loans receivable outstanding are summarized as follows:

 

         
(Dollars are in thousands)   September 30, 2017   December 31, 2016
Real estate secured:                
Commercial   $ 114,880     $ 103,331  
Construction and land development     30,878       25,755  
Residential 1-4 family     254,234       249,700  
Multifamily     14,790       12,582  
Farmland     23,287       24,948  
Total real estate loans     438,069       416,316  
Commercial     36,382       26,955  
Agriculture     3,733       3,164  
Consumer installment loans     22,519       22,188  
All other loans     687       6  
Total loans   $ 501,390     $ 468,629  

 

Loans receivable on nonaccrual status are summarized as follows:

 

         
         
(Dollars are in thousands)   September 30, 2017   December 31, 2016
Real estate secured:                
Commercial   $ 2,040     $ 3,403  
Construction and land development     274       319  
Residential 1-4 family     6,640       8,355  
Multifamily     155       166  
Farmland     1,062       1,003  
Total real estate loans     10,171       13,246  
Agriculture     7       83  
Consumer installment loans     45       76  
Total loans receivable on nonaccrual status   $ 10,223     $ 13,405  

 

Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2017 and 2016 was $456 thousand and $397 thousand, respectively.

 

  13  

 

The following table presents information concerning the Company’s investment in loans considered impaired as of September 30, 2017 and December 31, 2016:

 

             

 

 

As of September 30, 2017

(Dollars are in thousands)

 

 

 

Recorded

Investment

 

 

Unpaid Principal Balance

 

 

 

Related

Allowance

With no related allowance recorded:                        
Real estate secured:                        
Commercial   $ 2,497     $ 2,581     $ —    
Construction and land development     —         —         —    
Residential 1-4 family     3,813       4,112       —    
Multifamily     285       326       —    
Farmland     1,501       1,884       —    
Commercial     —         —         —    
Agriculture     18       18       —    
Consumer installment loans     8       8       —    
All other loans     —         —         —    
With an allowance recorded:                        
Real estate secured:                        
Commercial     2,322       2,420       339  
Construction and land development     202       447       69  
Residential 1-4 family     564       593       104  
Multifamily     1,310       1,377       194  
Farmland     609       621       245  
Commercial     496       496       181  
Agriculture     —         —         —    
Consumer installment loans     —         —         —    
All other loans     —         —         —    
Total   $ 13,625     $ 14,883     $ 1,132  

 

 

As of December 31, 2016

(Dollars are in thousands)

   

 

 

Recorded

Investment

     

 

Unpaid Principal Balance

     

 

 

Related

Allowance

 
With no related allowance recorded:                        
Real estate secured:                        
Commercial   $ 3,636     $ 4,055     $ —    
Construction and land development     5       5       —    
Residential 1-4 family     3,861       4,182       —    
Multifamily     301       342       —    
Farmland     3,895       4,601       —    
Commercial     —         —         —    
Agriculture     19       19       —    
Consumer installment loans     26       43       —    
All other loans     —         —         —    
With an allowance recorded:                        
Real estate secured:                        
Commercial     1,191       1,270       65  
Construction and land development     240       469       106  
Residential 1-4 family     555       565       56  
Multifamily     —         —         —    
Farmland     591       602       299  
Commercial     67       67       18  
Agriculture     5       5       5  
Consumer installment loans     9       9       3  
All other loans     —         —         —    
Total   $ 14,401     $ 16,234     $ 552  

 

  14  

 

 

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

 

                 
    Nine Months Ended
    September 30, 2017   September 30, 2016

 

 

(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   $ 2,976     $ 73     $ 4,222     $ 77  
Construction and land development     2       —         89       —    
Residential 1-4 family     3,827       152       3,716       140  
Multifamily     402       15       288       14  
Farmland     2,538       52       4,211       163  
Commercial     —         —         —         —    
Agriculture     19       1       29       2  
Consumer installment loans     13       —         24       —    
All other loans     —         —         —         —    
With an allowance recorded:                                
Real estate secured:                                
Commercial     1,208       80       1,539       6  
Construction and land development     222       —         271       —    
Residential 1-4 family     634       14       939       18  
Multifamily     660       48       100       —    
Farmland     673       26       572       18  
Commercial     282       24       71       2  
Agriculture     2       —         107       1  
Consumer installment loans     2       —         30       1  
All other loans     —         —         —         —    
Total   $ 13,460     $ 485     $ 16,208     $ 442  

 

                 
    Three Months Ended
    September 30, 2017   September 30, 2016

 

 

(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   $ 2,757     $ 9     $ 3,965     $ 4  
Construction and land development     —         —         7       —    
Residential 1-4 family     3,833       50       3,833       37  
Multifamily     287       4       307       3  
Farmland     1,193       26       4,274       61  
Commercial     —         —         —         —    
Agriculture     18       —         23       —    
Consumer installment loans     9       —         22       (2 )
All other loans     —         —         —         —    
With an allowance recorded:                                
Real estate secured:                                
Commercial     1,516       74       1,309       6  
Construction and land development     209       —         259       —    
Residential 1-4 family     567       5       606       7  
Multifamily     1,321       16       83       (4 )
Farmland     756       10       504       6  
Commercial     497       8       68       —    
Agriculture     —         —         97       3  
Consumer installment loans     —         —         32       1  
All other loans     —         —         —         —    
Total   $ 12,963     $ 202     $ 15,389     $ 122  

  15  

 

An age analysis of past due loans receivable is below. At September 30, 2017 and December 31, 2016, there were no loans over 90 days past due that were accruing.

                         

 

 

 

 

 

As of September 30, 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   $ 203     $ 530     $ 528     $ 1,261     $ 113,619     $ 114,880  

Construction and land

development

    19       —         43       62       30,816       30,878  
Residential 1-4 family     3,523       1,076       1,121       5,720       248,514       254,234  
Multifamily     —         —         —         —         14,790       14,790  
Farmland     55       —         284       339       22,948       23,287  
Total real estate loans     3,800       1,606       1,976       7,382       430,687       438,069  
Commercial     127       —         —         127       36,255       36,382  
Agriculture     1       —         4       5       3,728       3,733  

Consumer installment

Loans

    66       1       20       87       22,432       22,519  
All other loans     —         —         —         —         687       687  
Total loans   $ 3,994     $ 1,607     $ 2,000     $ 7,601     $ 493,789     $ 501,390  

 

                         

 

 

 

 

 

As of December 31, 2016

(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   $ 1,676     $ 307     $ 1,083     $ 3,066     $ 100,265     $ 103,331  

Construction and land

development

    103       17       44       164       25,591       25,755  
Residential 1-4 family     4,237       1,547       2,233       8,017       241,683       249,700  
Multifamily     1,367       —         —         1,367       11,215       12,582  
Farmland     2,987       —         —         2,987       21,961       24,948  
Total real estate loans     10,370       1,871       3,360       15,601       400,715       416,316  
Commercial     20       —         —         20       26,935       26,955  
Agriculture     19       —         78       97       3,067       3,164  

Consumer installment

Loans

    110       15       36       161       22,027       22,188  
All other loans     —         —         —         —         6       6  
Total loans   $ 10,519     $ 1,886     $ 3,474     $ 15,879     $ 452,750     $ 468,629  

 

  16  

 

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 September 30, 2017

(Dollars are in thousands)

 

 

 

Pass

 

 

Special

Mention

 

 

 

Substandard

 

 

 

Total

Real estate secured:                                
   Commercial   $ 106,115     $ 4,772     $ 3,993     $ 114,880  
   Construction and land development     29,757       847       274       30,878  
   Residential 1-4 family     244,924       1,971       7,339       254,234  
   Multifamily     12,977       157       1,656       14,790  
   Farmland     19,491       2,049       1,747       23,287  
Total real estate loans     413,264       9,796       15,009       438,069  
Commercial     33,665       2,221       496       36,382  
Agriculture     3,700       26       7       3,733  
Consumer installment loans     22,459       3       57       22,519  
All other loans     687       —         —         687  
Total   $ 473,775     $ 12,046     $ 15,569     $ 501,390  

 

As of December 31, 2016

(Dollars are in thousands)

   

 

 

Pass

     

 

Special

Mention

     

 

 

Substandard

     

 

 

Total

 
Real estate secured:                                
   Commercial   $ 92,562     $ 6,922     $ 3,847     $ 103,331  
   Construction and land development     23,905       1,531       319       25,755  
   Residential 1-4 family     238,400       2,117       9,183       249,700  
   Multifamily     10,848       1,367       367       12,582  
   Farmland     19,070       1,545       4,333       24,948  
Total real estate loans     384,785       13,482       18,049       416,316  
Commercial     26,197       691       67       26,955  
Agriculture     3,076       —         88       3,164  
Consumer installment loans     22,086       —         102       22,188  
All other loans     6       —         —         6  
Total   $ 436,150     $ 14,173       18,306     $ 468,629  

 

  17  

 

 

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended September 30, 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 September 30, 2017

(Dollars are in thousands)

 

Beginning

Balance

 

Charge

Offs

 

 

Recoveries

 

 

Provisions

  Ending Balance
Real estate secured:                                        
Commercial   $ 1,625     $ (179 )   $ 191     $ (58 )   $ 1,579  
Construction and land development     346       —         —         (53 )     293  
Residential 1-4 family     2,376       (369 )     39       48       2,094  
Multifamily     241       —         —         181       422  
Farmland     428       (49 )     358       (309 )     428  
Total real estate loans     5,016       (597 )     588       (191 )     4,816  
Commercial     163       (11 )     147       127       426  
Agriculture     31       —         4       (10 )     25  
Consumer installment loans     123       (134 )     17       160       166  
All other loans     —         —         —         4       4  
Unallocated     739       —         —         (90 )     649  
Total   $ 6,072     $ (742 )   $ 756     $ —       $ 6,086  

 

                         
    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of September 30, 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 $ 339 $ 1,240 $ 1,579 $ 4,819 $ 110,061 $ 114,880

Construction and land

development

  69   224   293   202   30,676   30,878
Residential 1-4 family   104   1,990   2,094   4,377   249,857   254,234
Multifamily   194   228   422   1,595   13,195   14,790
Farmland   245   183   428   2,110   21,177   23,287
Total real estate loans   951   3,865   4,816   13,103   424,966   438,069
Commercial   181   245   426   496   35,886   36,382
Agriculture   -   25   25   18   3,715   3,733
Consumer installment loans   -   166   166   8   22,511   22,519
All other loans   -   4   4   -   687   687
Unallocated   -   649   649   -   -   -
Total $ 1,132 $ 4,954 $ 6,086 $ 13,625 $ 487,765 $ 501,390

 

  18  

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2016. 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, 2016

(Dollars are in thousands)

 

Beginning

Balance

 

Charge

Offs

 

 

Recoveries

 

 

Provisions

  Ending Balance
Real estate secured:                                        
Commercial   $ 2,384     $ (557 )   $ 220     $ (422 )   $ 1,625  
Construction and land development     332       (5 )     26       (7 )     346  
Residential 1-4 family     2,437       (720 )     87       572       2,376  
Multifamily     232       (18 )     —         27       241  
Farmland     675       (2 )     103       (348 )     428  
Total real estate loans     6,060       (1,302 )     436       (178 )     5,016  
Commercial     266       (65 )     62       (100 )     163  
Agriculture     124       —         7       (100 )     31  
Consumer installment loans     128       (83 )     24       54       123  
All other loans     1       —         —         (1 )     —    
Unallocated     914       —         —         (175 )     739  
Total   $ 7,493     $ (1,450 )   $ 529     $ (500 )   $ 6,072  

 

                         
    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of December 31, 2016

(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 $ 65 $ 1,560 $ 1,625 $ 4,827 $ 98,504 $ 103,331

Construction and land

development

  106   240   346   245   25,510   25,755
Residential 1-4 family   56   2,320   2,376   4,416   245,284   249,700
Multifamily   -   241   241   301   12,281   12,582
Farmland   299   129   428   4,486   20,462   24,948
Total real estate loans   526   4,490   5,016   14,275   402,041   416,316
Commercial   18   145   163   67   26,888   26,955
Agriculture   5   26   31   24   3,140   3,164
Consumer installment loans   3   120   123   35   22,153   22,188
All other loans   -   -   -   -   6   6
Unallocated   -   739   739   -   -   -
Total $ 552 $ 5,520   6,072 $ 14,401 $ 454,228 $ 468,629

 

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.

  19  

 

 

NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

 

At September 30, 2017 there were $7.3 million in loans that are classified as troubled debt restructurings compared to $9.6 million at December 31, 2016. The following table presents information related to loans modified as troubled debt restructurings during the nine and three months ended September 30, 2017 and 2016.

                         
                         
   

For the nine months ended

September 30, 2017

 

For the nine months ended

September 30, 2016

 

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     $ 341  

Construction and land

Development

    —         —         —         —         —         —    
   Residential 1-4 family     —         —         —         —         —         —    
   Multifamily     —         —         —         —         —         —    
   Farmland     —         —         —         1       291       280  
      Total real estate loans     —         —         —         2       632       621  
Commercial     1       443       443       —         —         —    
Agriculture     —         —         —         —         —         —    
Consumer installment loans     —         —         —         —         —         —    
All other loans     —         —         —         —         —         —    
Total     1     $ 443     $ 443       2     $ 632     $ 621  

 

  20  

 

During the nine months ended September 30, 2017, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate was not modified on this loan; however, the payment terms and maturity date were changed.

 

During the nine months ended September 30, 2016, the Company modified the terms of two loans for which the modification was considered to be a troubled debt restructuring. On one loan, the interest rate and maturity date were not modified; however, the payment terms were changed. On one loan, the interest rate was lowered and the payment terms and maturity date were changed.

 

During the three months ended September 30, 2017 and 2016, the Company modified no loans that were considered to be a troubled debt restructuring.

 

No loans previously modified as troubled debt restructurings defaulted during the nine months ended September 30, 2017. There was one commercial real estate loan with a recorded investment of $302 thousand that had been modified as a troubled debt restructuring that defaulted during the nine months ended September 30, 2016, which was within twelve months of the loan’s modification date.

 

There were no loans modified as troubled debt restructurings that defaulted during the three months ended September 30, 2017 and 2016, which were within twelve months of their modification date. 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.

 

NOTE 9 OTHER REAL ESTATE OWNED:

 

The following table summarizes the activity in other real estate owned for the nine months ended September 30, 2017 and the year ended December 31, 2016:

(Dollars are in thousands)   September 30,
2017
  December 31, 2016
Balance, beginning of period   $ 10,655     $ 12,398  
Additions     2,761       4,577  
Purchases of/improvements to
other real estate owned
    —         48  
Transfers of premises and equipment
to other real estate owned
    125       —    
Transfers of other real estate owned
to premises and equipment
    —         (125 )
Proceeds from sales of
other real estate owned
    (4,145 )     (4,232 )
Proceeds from insurance claims
on other real estate owned
    (12 )     —    
Loans made to finance sales of
other real estate owned
    (1,225 )     (818 )
Adjustment of carrying value     (668 )     (1,414 )
Deferred gain from sales     44       —    
Gain (loss) from sales     (29 )     221  
Balance, end of period   $ 7,506     $ 10,655  


  21  

 

 

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. The Company’s available-for-sale securities, totaling $68.2 million and $70.0 million at September 30, 2017 and December 31, 2016, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

 

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. The aggregate carrying amounts of impaired loans carried at fair value were $12.5 million and $13.8 million at September 30, 2017 and December 31, 2016, respectively.

 

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. The aggregate carrying amounts of foreclosed assets were $7.5 million and $10.7 million at September 30, 2017 and December 31, 2016, respectively.

 

  22  

 

 

Assets and liabilities measured at fair value are as follows as of September 30, 2017 (for purpose of this table the impaired loans are shown net of the related allowance):

             
(Dollars are in thousands)   Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
                       
    U.S. Government Agencies   $ —       $ 24,311     $ —    
    Taxable municipals     —         2,293       —    
    Corporate bonds     —         4,097       —    
    Mortgage backed securities     —         37,530       —    
                         
(On a non-recurring basis)
Other real estate owned
    —         —         7,506  
Impaired loans:                        
  Real estate secured:                        
      Commercial     —         —         4,480  
      Construction and land development     —         —         133  
      Residential 1-4 family     —         —         4,273  
      Multifamily     —         —         1,401  
      Farmland     —         —         1,865  
  Commercial     —         —         315  
  Agriculture     —         —         18  
  Consumer installment loans     —         —         8  
  All other loans     —         —         —    
Total   $ —       $ 68,231     $ 19,999  

 

Assets and liabilities measured at fair value are as follows as of December 31, 2016 (for purpose of this table the impaired loans are shown net of the related allowance):

             
(Dollars are in thousands)   Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
                       
    U.S. Government Agencies   $ —       $ 24,632     $ —    
    Taxable municipals     —         2,292       —    
    Corporate bonds     —         3,749       —    
    Mortgage backed securities     —         39,338       —    
                         
(On a non-recurring basis)
Other real estate owned
    —         —         10,655  
Impaired loans:                        
  Real estate secured:                        
      Commercial     —         —         4,762  
      Construction and land development     —         —         139  
      Residential 1-4 family     —         —         4,360  
      Multifamily     —         —         301  
      Farmland     —         —         4,187  
  Commercial     —         —         49  
  Agriculture     —         —         19  
  Consumer installment loans     —         —         32  
  All other loans     —         —         —    
Total   $ —       $ 70,011     $ 24,504  

 

  23  

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2017 and December 31, 2016, 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 September 30,

2017

 

 

 

Fair Value at December 31, 2016

 

 

 

Valuation Technique

 

 

Significant Unobservable Inputs

  General Range of Significant Unobservable Input Values
                     
Impaired Loans $ 12,493 $ 13,849   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 $ 7,506 $ 10,655   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 following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. 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 following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2017 and December 31, 2016. 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, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. 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 as of September 30, 2017 and December 31, 2016.

  24  

 

 

                     
            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)
September 30, 2017                    
Financial Instruments – Assets                                        
   Net Loans   $ 495,304     $ 497,359     $ —       $ 484,866     $ 12,493  
                                         
Financial Instruments – Liabilities                                        
   Time Deposits     267,283       266,990       —         266,990       —    
   FHLB Advances     7,858       8,053       —         8,053       —    
                                         
December 31, 2016                                        
Financial Instruments – Assets                                        
   Net Loans   $ 462,557     $ 467,707     $ —       $ 453,858     $ 13,849  
                                         
Financial Instruments – Liabilities                                        
   Time Deposits     247,819       247,258       —         247,258       —    
   FHLB Advances     13,758       13,993       —         13,993       —    

 

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 NPB Good Steward Properties, LLC (“Good Steward”) for a total purchase price of $6.2 million. Good Steward is not an affiliate of the Company or the Bank. 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 Good Steward 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 Good Steward 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 14.68 years.

 

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 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.

  25  

 

 

 

As a result of the sale and the determination that the corresponding leases were operating leases, the Company recognized a gain of $2.6 million on the sale and leaseback transactions. The Bank and its parent, New Peoples Bankshares, Inc. and affiliates have no relationship with Good Steward other than those discussed above.

 

The Company’s operating lease cost for the three and nine months ended September 30, 2017 as a result of the transactions discussed above was $112 thousand and $150 thousand, respectively. All other operating leases the Company has were evaluated and determined that they are immaterial to the financial statements.

 

NOTE 12 SUBSEQUENT EVENTS:

 

During the month of October 2017, a principal shareholder of the Company exercised 506,666 common stock warrants at a price of $1.75 per share. As a result of this exercise an additional $887 thousand of capital was raised by the Company. The additional liquidity provided by the funds will be used by the Company to pay its operating expenses and trust preferred interest payments.

 

On October 23, 2017, the Board of Directors approved for the Bank to pay the Company a dividend of $111 thousand using 68,735 shares of the Company’s common stock that had been repossessed by the Bank as a result of collection activities on loans. By law the 68,735 shares of the Company’s common stock became part of the Company’s authorized and unissued shares and would be available for reissuance in the future.

 

NOTE 13 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 will be effective for the Company for reporting periods beginning after December 15, 2017.

 

The Company will apply the guidance using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of revenue recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses. We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance, we do anticipate changes in our disclosures associated with our revenues. We will provide qualitative disclosures of our performance obligations related to our revenue recognition and we continue to evaluate disaggregation for significant categories of revenue in the scope of the guidance.

 

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its 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 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

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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).

 

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 amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

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 will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not expect to elect that option. We are evaluating the impact of the ASU on our consolidated financial position, results of operations, and cash flows. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

 

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 effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its 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 amendments will be effective for the Company for reporting periods beginning after December 15, 2017. 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.

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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, 2016. 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.

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Overview

 

During 2017, management’s focus has been on reducing nonperforming assets and growing the core business of the Bank. We believe significant progress is being made on both fronts. Although both initiatives result in higher expenses in the short term, over the longer-term we anticipate the resulting net income from these initiatives to be comparable to peer banks our size. Expenses to resolve problem assets remain high but our nonperforming assets have decreased to the lowest levels that they have been for many years. In the past couple of years, we have begun growing the Bank’s loans and deposits again, our core earnings base. We currently are fine tuning our processes to substantially improve efficiency in the core operations of the Bank and we are preparing the Company for the future trends of the financial industry as we see them. We anticipate both a reduction in expenses and an increase in revenues in the upcoming years.

 

The Company had net income for the quarter ended September 30, 2017 of $484 thousand, or basic net income per share of $0.02, as compared to a net income of $346 thousand, or basic net income per share of $0.01, for the quarter ended September 30, 2016. This is an improvement of $138 thousand, or 39.88%. The improvement was mainly driven by the $326 thousand improvement in net interest income offset by the $235 thousand decrease in noninterest income in the quarter to quarter comparison. The Company had net income for the nine months ended September 30, 2017 of $3.2 million, or basic net income per share of $0.14, as compared to the nine months ending September 30, 2016 in which the Company had net income of $1.9 million, or $0.08 basic net income per share. This is an improvement of $1.3 million, or $0.06 per share. The improvement was mainly driven by the $2.6 million gain recognized on the sale and leaseback transactions the Company completed during the second quarter of 2017 and a $629 thousand increase in net interest income, which was offset by a $1.4 million increase in noninterest expenses.

 

Quarter-to-Date Results

 

Highlights from the second quarter of 2017 include:

 

· A $12.6 million, or 2.58%, increase in loans, during the quarter;
· No provision for loan losses taken in the third quarter;
· An increase of $5.3 million, or 0.91%, in total deposits during the quarter;
· A decrease of $2.4 million, or 23.70%, in total past due loans during the quarter; and,
· Strong net interest margin of 3.93% for the quarter.

 

In the third quarter of 2017, our net interest margin was 3.93%, as compared to 3.92% for the same period in 2016, an improvement of 1 basis point. The Company’s primary source of income, net interest income, increased $326 thousand, or 5.98%, to $5.8 million for the third quarter of 2017 from $5.5 million for the same period in 2016. Loan interest income increased $391 thousand, or 6.82%, from $5.7 million for the third quarter of 2016 to $6.1 million for the third quarter of 2017. Investment interest income increased $57 thousand to $391 thousand for the third quarter of 2017 as compared to $334 thousand for the third quarter of 2016. Interest expense increased $162 thousand, or 24.14%, from $671 thousand for the quarter ended September 30, 2016 to $833 thousand for the same quarter of 2017 as a result of increases in our interest rates on time deposits.

 

No provision for loan losses was recorded during the third quarters of 2017 and 2016, respectively.

 

Noninterest income for the third quarter of 2017 was $1.8 million, which is a decrease of $235 thousand when compared to the $2.0 million for the same period in 2016, or 11.50%. This decrease was primarily result of the $156 thousand of income we recognized in the third quarter of 2016 for the sale of our existing insurance book of business that was a one-time event. We also experienced an $80 thousand increase in nonsufficient funds / overdraft fee income during the third quarter of 2017 when compared to the same period in 2016. The increase in nonsufficient funds / overdraft fee income was the result of the Optional Overdraft Protection Services we began offering to our deposit customers in June 2016. The increase in nonsufficient funds / overdraft fee income helps to offset the $63 thousand decrease in insurance and investment fees.

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Noninterest expense decreased $57 thousand, or 0.80%, to $7.1 million for the third quarter 2017 as compared to $7.2 million for the third quarter of 2016. Salaries and employee benefits were $3.4 million for the third quarter of 2017 and 2016, respectively.

Occupancy and equipment expenses remained comparable at $1.1 million for the third quarter of 2017 and 2016, respectively. Advertising expense decreased $16 thousand in the quarter-to-quarter comparison. Other real estate owned and repossessed asset expenses decreased $120 thousand, or 34.58%, to $227 thousand for the third quarter of 2017 as compared to $347 thousand for the same period in 2016. Writedowns on other real estate owned were $78 thousand during the third quarter of 2017 as compared to $241 thousand for the same period in 2016. During the third quarter of 2017 we had net losses on the sale of other real estate owned of $25 thousand as compared to net gains on the sale of other real estate owned of $104 thousand for the same period in 2016.

 

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 93.55% for the third quarter of 2017 as compared to 95.45% for the same period in 2016. Included in this calculation are the other real estate owned write-downs which significantly impacts the ratio.

 

Year-to-Date Results

 

Highlights from the first nine months of 2017 include:

 

· $2.6 million gain recognized on the sale and leaseback transactions;
· A reduction in nonaccrual loans of $3.2 million, or 23.74% during the first nine months of 2017;
· Net recoveries of $14 thousand for the nine-months ended September 30, 2017, which is an improvement of $649 thousand, or 102.20%, versus net charges offs of $635 thousand reported for the nine-months ended September 30, 2016;
· $32.8 million, or 6.99% increase in loans during the first nine months of 2017;
· A decrease of $3.2 million, or 29.55%, in other real estate owned during the first nine months of 2017;
· An increase of $27.2 million, or 4.90% in total deposits during the first nine months of 2017;
· The Bank is considered well-capitalized under regulatory standards, and,
· Book value per share of $2.16 as of September 30, 2017.

 

Net interest income year-to-date for September 30, 2017 was $16.9 million, which was an increase of $629 thousand, or 3.86% when compared to the same period in 2016. Loan interest income for the first nine months of 2017 increased $992 thousand, or 5.87%, from $16.9 million for the nine months ended September 30, 2016 to $17.9 million for the nine months ended September 30, 2017. Interest expense increased $414 thousand, or 21.44%, from $1.9 million for the first nine months of 2016 to $2.3 million for the same period in 2017 as a result of increases in our interest rates on time deposits.

 

No provision for loan losses was recorded during the first nine months of 2017 as compared to the negative provision of $500 thousand that was recorded in the first nine months of 2016.

 

Year-to-date September 30, 2017, noninterest income increased to $7.9 million from $5.4 million in 2016. This was an increase of $2.5 million, or 47.36%. This increase was primarily due to the $2.6 million gain recognized on the sale and leaseback transactions completed during the second quarter of 2017. We also experienced a $741 thousand increase in nonsufficient funds / overdraft fee income during the first nine months of 2017 when compared to the same period in 2016. The increase in nonsufficient funds / overdraft fee income was the result of the Optional Overdraft Protection Services we began offering to our deposit customers in June 2016. The increase in nonsufficient funds / overdraft fee income offsets the $240 thousand decrease in gains on the sale of investment securities and $258 thousand decrease in insurance and investment fees.

 

Noninterest expense increased $1.4 million, or 7.06%, for the first nine months of 2017 from $20.3 million for the nine months ended September 30, 2016 to $21.7 million for the nine months ended September 30, 2017. The increase was largely due to expenses associated with other real estate owned and repossessed assets as well as expenses related to investments in technology, lending staff, and new products and services in which we have not yet realized all of the benefits of these new additions. For the nine months ended September 30, 2017, salaries and employee benefits increased $181 thousand, or 1.82%, to $10.1 million as compared to $10.0 million for the same period in 2016. This increase was primarily the result of seasoned commercial bankers hired throughout 2016 and 2017 as a part of our strategy to grow the loan portfolio, the opening of a loan production office in Jonesborough, Tennessee to expand our market presence in the Tri-Cities, Tennessee area, staff added to operate the Interactive Teller Machines (“ITMs”) and provide digital banking services, and staffing for new products and services, such as secondary market mortgage staff.

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Occupancy and equipment expenses increased $334 thousand from $3.0 million for the first nine months of 2016 to $3.4 million for the first nine months of 2017. The increase in occupancy and equipment expenses was mainly due to the rollout of the ITMs during 2016 in our 19 offices and 4 other locations. The ITMs, a new, state-of-the-art technology which replaced the Bank’s ATMs, help provide additional convenience by providing teller services from 7 AM to 7 PM Monday through Saturday. We anticipate the addition of the ITMs will create efficiencies going forward as usage continues to increase. In addition, we have been transitioning our bank branches to the universal banker model. This model utilizes staff in multiple job functions versus staffing specialized in one area. To help accommodate this model, investments in video conferencing, cash recyclers, and other technological tools have been implemented. Although costs have increased, as we continue to grow, these costs should maintain and staffing costs in this area should decline in the future.

 

Other real estate owned and repossessed asset expenses increased $681 thousand, or 113.69%, to $1.3 million for the first nine months of 2017 as compared to $599 thousand for the same period in 2016. During the first nine months of 2017 we had net losses on the sale of other real estate owned of $29 thousand as compared to a net gains on the sale of other real estate owned of $290 thousand for the same period in 2016. Writedowns on other real estate owned were $668 thousand for the first nine months of 2017 as compared to writedowns of $265 thousand for the same period in 2016. These writedowns were primarily the result of price reductions and auctions that helped us in being successful in reducing our other real estate owned by $3.2 million during the first nine months of 2017. We believe that future expenses should be less as we anticipate a lower level of foreclosed properties to manage and liquidate.

 

Balance Sheet

 

Total assets increased $30.9 million, or 4.87%, to $665.2 million at September 30, 2017 from $634.3 million at December 31, 2016. The main driver in the increase was an increase of $32.8 million in loans as a result of our efforts to conservatively grow the loan portfolio. $4.9 million of the $32.8 million increase was related to the loan provided in the financing of the sale and lease back transactions previously discussed in Note 11. Going forward, we anticipate total assets increasing due to our plan to prudently grow the loan portfolio, as we believe we accomplished in the first nine months of 2017. 

 

Total investments decreased $1.8 million, or 2.54%, to $68.2 million at September 30, 2017 from $70.0 million at December 31, 2016. Interest bearing deposits