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 June 30, 2018
OR
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _______________ to _______________
Commission File No. 333-204842
New Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 47-4314938 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
45 North Whittaker Street, New Buffalo, Michigan | 49117 | |
(Address of Principal Executive Offices) | (Zip Code) |
(269) 469-2222
(Registrant’s telephone number)
N/A
(Former name or former address, 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 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer [ ] (Do not check if smaller reporting company) Emerging growth company [X] | Smaller reporting company [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of August 12, 2018, the latest practicable date, 719,531 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.
Form 10-Q
Index
Page | ||
Item 1. | ||
Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 | 2 | |
3 | ||
4 | ||
5 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 6 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28 |
Item 3. | 36 | |
Item 4. | 36 | |
Item 1. | 37 | |
Item 1A. | 37 | |
Item 2. | 37 | |
Item 3. | 37 | |
Item 4. | 37 | |
Item 5. | 37 | |
Item 6. | 37 | |
38 | ||
Part I – Financial Information
Condensed Consolidated Balance Sheets
June 30, 2018 (Unaudited) and December 31, 2017
(In thousands, except share data)
June 30, | December 31, | |||||||
| 2018 | 2017 | ||||||
| Assets | ||||||||
Cash and due from banks | $ | 1,757 | $ | 1,085 | ||||
Interest-earning demand deposits | 3,439 | 2,997 | ||||||
Federal funds sold | 12,269 | 11,711 | ||||||
Cash and cash equivalents | 17,465 | 15,793 | ||||||
Interest-earning time deposits in banks | - | 744 | ||||||
Loans held for sale | - | 3,234 | ||||||
Loans, net of allowance for loan losses of $1,076, and $1,123 at June 30, 2018 and December 31, 2017, respectively | 92,415 | 97,512 | ||||||
Premises and equipment | 1,906 | 1,894 | ||||||
Federal Home Loan Bank stock | 468 | 468 | ||||||
Accrued interest receivable | 259 | 267 | ||||||
Bank owned life insurance | 5,674 | 5,589 | ||||||
Servicing rights | 1,144 | 937 | ||||||
Prepaid expenses and other assets | 200 | 441 | ||||||
Total assets | $ | 119,531 | $ | 126,879 | ||||
Liabilities and Shareholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 33,322 | $ | 37,025 | ||||
Savings and money market accounts | 24,663 | 24,742 | ||||||
Time | 35,254 | 39,921 | ||||||
Total deposits | 93,239 | 101,688 | ||||||
Borrowings | 9,027 | 9,027 | ||||||
Other liabilities | 1,475 | 812 | ||||||
Total liabilities | 103,741 | 111,527 | ||||||
Commitments and Contingencies | - | - | ||||||
Redeemable common stock held by Employee Stock Ownership Plan (ESOP) | 171 | 160 | ||||||
Shareholders' Equity | ||||||||
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued | - | - | ||||||
Common stock, $0.01 par value, 4,000,000 shares authorized, 719,531 shares issued and oustanding | 7 | 7 | ||||||
Additional paid-in capital | 5,878 | 5,827 | ||||||
Unearned ESOP shares | (472 | ) | (472 | ) | ||||
Retained earnings | 10,377 | 9,990 | ||||||
Total shareholders' equity | 15,790 | 15,352 | ||||||
Less maximum cash obligation related to ESOP shares | (171 | ) | (160 | ) | ||||
Total shareholders' equity less maximum cash obligation related to ESOP shares | 15,619 | 15,192 | ||||||
Total liabilities and shareholders' equity | $ | 119,531 | $ | 126,879 | ||||
See notes to condensed consolidated financial statements
Condensed Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)
(In thousands, except share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Interest Income | ||||||||||||||||
Loans | $ | 1,174 | $ | 1,051 | $ | 2,335 | $ | 1,982 | ||||||||
Interest-bearing deposits | 59 | 38 | 114 | 56 | ||||||||||||
Total interest income | 1,233 | 1,089 | 2,449 | 2,038 | ||||||||||||
Interest Expense | ||||||||||||||||
Deposits | 216 | 211 | 432 | 377 | ||||||||||||
Borrowings | 40 | 39 | 80 | 78 | ||||||||||||
Total interest expense | 256 | 250 | 512 | 455 | ||||||||||||
Net Interest Income | 977 | 839 | 1,937 | 1,583 | ||||||||||||
Provision (Credit) for Loan Losses | - | 31 | (50 | ) | 31 | |||||||||||
Net Interest Income After Provision (Credit) for Loan Losses | 977 | 808 | 1,987 | 1,552 | ||||||||||||
Noninterest Income | ||||||||||||||||
Service charges and fees | 93 | 107 | 175 | 173 | ||||||||||||
Gain on sale of loans | 284 | 725 | 666 | 939 | ||||||||||||
Gain on sale of foreclosed real estate, net | - | 1 | - | 30 | ||||||||||||
Income from bank owned life insurance | 43 | 43 | 85 | 85 | ||||||||||||
Loan servicing fees (costs), net | (5 | ) | 13 | (4 | ) | 27 | ||||||||||
Other operating | 8 | 8 | 17 | 19 | ||||||||||||
Total noninterest income | 423 | 897 | 939 | 1,273 | ||||||||||||
Noninterest Expense | ||||||||||||||||
Salaries and employee benefits | 666 | 678 | 1,358 | 1,308 | ||||||||||||
Occupancy and equipment | 94 | 104 | 190 | 199 | ||||||||||||
Data processing fees | 123 | 130 | 246 | 244 | ||||||||||||
Franchise taxes | 18 | 30 | 18 | 30 | ||||||||||||
FDIC insurance premiums | 10 | 10 | 29 | 18 | ||||||||||||
Insurance premiums | 10 | 10 | 20 | 20 | ||||||||||||
Professional services | 135 | 130 | 300 | 251 | ||||||||||||
Impairment losses and expenses of foreclosed real estate | - | 4 | - | 13 | ||||||||||||
Other | 197 | 110 | 378 | 262 | ||||||||||||
Total noninterest expense | 1,253 | 1,206 | 2,539 | 2,345 | ||||||||||||
Net Income | $ | 147 | $ | 499 | $ | 387 | $ | 480 | ||||||||
Earnings per share - basic | $ | 0.23 | $ | 0.77 | $ | 0.60 | $ | 0.74 | ||||||||
Earnings per share - diluted | $ | 0.22 | $ | 0.77 | $ | 0.58 | $ | 0.74 | ||||||||
Weighted-average shares basic | 649,914 | 546,387 | 649,640 | 546,262 | ||||||||||||
Weighted-average shares diluted | 668,230 | 546,387 | 668,744 | 546,262 | ||||||||||||
See notes to condensed consolidated financial statements
Condensed Consolidated Statement of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 2018 (Unaudited)
(In thousands)
Maximum Cash | ||||||||||||||||||||||||
Additional | Unearned | Obligation | ||||||||||||||||||||||
Common | Paid-in | ESOP | Retained | Related to | ||||||||||||||||||||
Stock | Capital | Shares | Earnings | ESOP Shares | Total | |||||||||||||||||||
Balance at January 1, 2018 | $ | 7 | $ | 5,827 | $ | (472 | ) | $ | 9,990 | $ | (160 | ) | $ | 15,192 | ||||||||||
Compensation expense related to restricted shares | - | 33 | - | - | - | 33 | ||||||||||||||||||
Compensation expense related to stock options | - | 18 | - | - | - | 18 | ||||||||||||||||||
Change related to ESOP shares | - | - | - | - | (11 | ) | (11 | ) | ||||||||||||||||
Net income for the period | - | - | - | 387 | - | 387 | ||||||||||||||||||
Balance at June 30, 2018 | $ | 7 | $ | 5,878 | $ | (472 | ) | $ | 10,377 | $ | (171 | ) | $ | 15,619 | ||||||||||
See notes to condensed consolidated financial statements
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017 (Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Operating Activities | ||||||||
Net income (loss) | $ | 387 | $ | 480 | ||||
Items not requiring (providing) cash | ||||||||
Depreciation and amortization | 140 | 74 | ||||||
Provision (credit) for loan losses | (50 | ) | 31 | |||||
Deferred loan origination fees, costs, premiums, discounts, net | (15 | ) | (5 | ) | ||||
Gain on sale of loans | (666 | ) | (939 | ) | ||||
Proceeds from sales of loans originated for sale | 12,514 | 13,129 | ||||||
Loans originated for sale | (8,874 | ) | (12,539 | ) | ||||
Loss on sale of foreclosed real estate | - | (30 | ) | |||||
Compensation expense related to stock benefit and other plans | 51 | 22 | ||||||
Increase in cash surrender value of life insurance | (85 | ) | (85 | ) | ||||
Changes in | ||||||||
Accrued interest receivable | 8 | (17 | ) | |||||
Prepaid expenses and other assets | 241 | (14 | ) | |||||
Other liabilities | 663 | 625 | ||||||
Net cash provided by operating activities | 4,314 | 732 | ||||||
Investing Activities | ||||||||
Net change in loans | 5,162 | (7,849 | ) | |||||
Net change in interest-earning time accounts | 744 | 248 | ||||||
Purchase of premises and equipment | (99 | ) | (2 | ) | ||||
Proceeds from sale of foreclosed assets | - | 313 | ||||||
Net cash provided by (used in) investing activities | 5,807 | (7,290 | ) | |||||
Financing Activities | ||||||||
Net increase (decrease) in deposits | (8,449 | ) | 18,671 | |||||
Net change in federal funds purchased | - | (1,000 | ) | |||||
Net cash provided by (used in) financing activities | (8,449 | ) | 17,671 | |||||
Increase in Cash and Cash Equivalents | 1,672 | 11,113 | ||||||
Cash and Cash Equivalents, Beginning of Period | 15,793 | 9,857 | ||||||
Cash and Cash Equivalents, End of Period | $ | 17,465 | $ | 20,970 | ||||
Supplemental Disclosure of Cash Flow Information | ||||||||
Cash paid during the period for: | ||||||||
Interest on deposits and borrowings | $ | 509 | $ | 447 | ||||
See notes to condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
Note 1: Basis of Presentation
The accompanying condensed consolidated balance sheet of New Bancorp, Inc. (the Company) as of December 31, 2017, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements of the Company as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017, were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Company for the year ended December 31, 2017 included in the Company’s Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Form 10-K.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of June 30, 2018, cash flows for the six months ended June 30, 2018 and 2017, and the results of operations for the three and six months ended June 30, 2018 and 2017. All interim amounts have not been audited and the results of operations for the three and six months ended June 30, 2018 herein, are not necessarily indicative of the results of operations to be expected for the entire year.
Principles of Consolidation
The consolidated financial statements as of and for the periods ended June 30, 2018 and December 31, 2017, include New Bancorp, Inc. and its wholly-owned subsidiary the New Buffalo Savings Bank “the Bank”, together referred to as the “Company.” Intercompany transactions and balances have been eliminated in consolidation. The conversion to stock form, including the formation of New Bancorp, Inc., was completed on October 19, 2015.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of deferred tax assets and fair values of financial instruments.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Note 2: Securities
The Company had no investment securities at June 30, 2018 and December 31, 2017. The Company had no sales of investment securities during the six month periods ended June 30, 2018 and 2017.
Note 3: Loans and Allowance for Loan Losses
The Company’s loan and allowance for loan losses policies are as follows:
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses and any unamortized deferred fees or costs on originated loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
Classes of loans at June 30, 2018 and December 31, 2017 include:
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Real estate loans | ||||||||
Residential | $ | 36,384 | $ | 41,474 | ||||
Commercial | 47,922 | 45,623 | ||||||
Construction and land | 9,036 | 10,746 | ||||||
Commercial business | 952 | 909 | ||||||
Consumer and other | 473 | 557 | ||||||
Total loans | 94,767 | 99,309 | ||||||
Less: | ||||||||
Net deferred loan fees, premiums and discounts | (336 | ) | (176 | ) | ||||
Undisbursed loans in process | (940 | ) | (498 | ) | ||||
Allowance for loan losses | (1,076 | ) | (1,123 | ) | ||||
Net loans | $ | 92,415 | $ | 97,512 | ||||
Residential Real Estate: The residential real estate loans are generally secured by owner-occupied 1-4 family residences. The Bank’s portfolio of home equity loans totaled $4.1 million and $4.8 million at June 30, 2018 and December 31, 2017, respectively, the preponderance of which were secured by first liens, or by second liens on properties where the Bank also holds the first lien. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Commercial Real Estate: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Construction and Land: Construction and land loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.
Commercial Business: The commercial business loan portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
The following tables present by portfolio segment, the activity in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 and the recorded investment in loans and impairment method as of June 30, 2018 and December 31, 2017:
For the Three Months Ended June 30, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
Residential | Commercial | and Land | Business | Consumer | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, April 1, 2018 | $ | 487 | $ | 541 | $ | 28 | $ | 17 | $ | 1 | $ | 1,074 | ||||||||||||
Provision (credit) for loan losses | (47) | 4 | 41 | 2 | - | - | ||||||||||||||||||
Charge-offs | - | - | - | - | - | - | ||||||||||||||||||
Recoveries | - | - | - | 2 | - | 2 | ||||||||||||||||||
Balance, June 30, 2018 | $ | 440 | $ | 545 | $ | 69 | $ | 21 | $ | 1 | $ | 1,076 | ||||||||||||
For the Six Months ended June 30, 2018 | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, January 1, 2018 | $ | 540 | $ | 484 | $ | 76 | $ | 15 | $ | 8 | $ | 1,123 | ||||||||||||
Provision (credit) for loan losses | (100 | ) | 61 | (7 | ) | 3 | (7 | ) | (50 | ) | ||||||||||||||
Charge-offs | - | - | - | - | - | - | ||||||||||||||||||
Recoveries | - | - | - | 3 | - | 3 | ||||||||||||||||||
Balance, June 30 , 2018 | $ | 440 | $ | 545 | $ | 69 | $ | 21 | $ | 1 | $ | 1,076 | ||||||||||||
For the Three Months Ended June 30, 2017 | ||||||||||||||||||||||||
Allowance for loan losses: | (In thousands) | |||||||||||||||||||||||
Balance, April 1, 2017 | $ | 578 | $ | 365 | $ | 78 | $ | 13 | $ | 8 | $ | 1,042 | ||||||||||||
Provision for loan losses | (33 | ) | 64 | (2 | ) | 2 | - | 31 | ||||||||||||||||
Charge-offs | - | - | - | - | - | - | ||||||||||||||||||
Recoveries | - | 13 | - | - | - | 13 | ||||||||||||||||||
Balance, June 30, 2017 | $ | 545 | $ | 442 | $ | 76 | $ | 15 | $ | 8 | $ | 1,086 | ||||||||||||
For the Six Months Ended June 30, 2017 | ||||||||||||||||||||||||
Allowance for loan losses: | (In thousands) | |||||||||||||||||||||||
Balance, January 1, 2017 | $ | 656 | $ | 326 | $ | 72 | $ | 4 | $ | 5 | $ | 1,063 | ||||||||||||
Provision for loan losses | (99 | ) | 112 | 4 | 11 | 3 | 31 | |||||||||||||||||
Charge-offs | (12 | ) | (9 | ) | - | - | - | (21 | ) | |||||||||||||||
Recoveries | - | 13 | - | - | - | 13 | ||||||||||||||||||
Balance, June 30. 2017 | $ | 545 | $ | 442 | $ | 76 | $ | 15 | $ | 8 | $ | 1,086 | ||||||||||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
At June 30, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
Residential | Commercial | and Land | Business | Consumer | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance, individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Ending balance, collectively evaluated for impairment | $ | 440 | $ | 545 | $ | 69 | $ | 21 | $ | 1 | $ | 1,076 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 36,384 | $ | 47,922 | $ | 9,036 | $ | 952 | $ | 473 | $ | 94,767 | ||||||||||||
Ending balance; individually evaluated for impairment | $ | 1,982 | $ | 38 | $ | 2,465 | $ | - | $ | - | $ | 4,485 | ||||||||||||
Ending balance; collectively evaluated for impairment | $ | 34,402 | $ | 47,884 | $ | 6,571 | $ | 952 | $ | 473 | $ | 90,282 | ||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
Residential | Commercial | and Land | Business | Consumer | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance, individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Ending balance, collectively evaluated for impairment | $ | 545 | $ | 480 | $ | 76 | $ | 15 | $ | 7 | $ | 1,123 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 41,474 | $ | 45,623 | $ | 10,746 | $ | 909 | $ | 557 | $ | 99,309 | ||||||||||||
Ending balance; individually evaluated for impairment | $ | 2,294 | $ | 33 | $ | 2,312 | $ | - | $ | - | $ | 4,639 | ||||||||||||
Ending balance; collectively evaluated for impairment | $ | 39,180 | $ | 45,590 | $ | 8,434 | $ | 909 | $ | 557 | $ | 94,670 | ||||||||||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Internal Risk Categories
The Bank has adopted a standard loan grading system for all loans. Loans are selected for a grading review based on certain characteristics, including concentrations of credit and upon delinquency of 90 days or more. Definitions are as follows:
Pass: Loans categorized as Pass are higher quality loans that do not fit any of the other categories described below.
Special Mention/Watch: The loans identified as special mention/watch have an obvious flaw or a potential weakness that deserves special management attention, but which has not yet impacted collectability. These flaws or weaknesses, if left uncorrected, may result in the deterioration of the prospects of repayment or the deterioration of the Bank’s credit position.
Substandard: These are loans with a well-defined weakness, where the Bank has a serious concern about the borrower’s ability to make full repayment if the weaknesses are not corrected. The loan may contain a flaw, which could impact the borrower’s ability to repay, or the borrower’s continuance as a “going concern”. When collateral values are not sufficient to secure the loan and other weaknesses are present, the loan may be rated substandard. A loan will also be graded substandard when full repayment is expected, but it must come from the liquidation of collateral. All loans that are past due 90 days or more are classified as substandard.
Doubtful: These are loans with major defined weaknesses, where future charge-off of a part of the credit is highly likely. The primary repayment source is no longer viable and the viability of the secondary source of repayment is in doubt. The amount of loss is uncertain due to circumstances within the credit that are not yet fully developed and the loan is rated “Doubtful” until the loss can be accurately estimated.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Loss: These are loans that represent near term charge-offs. Loans classified as loss are considered uncollectible and of such little value that it is not desirable to continue carrying them as assets on the Bank’s financial statements, even though partial recovery may be possible at some future time.
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of June 30, 2018 and December 31, 2017:
June 30, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
Residential | Commercial | and Land | Business | Consumer | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Pass | $ | 34,466 | $ | 47,396 | $ | 7,919 | $ | 952 | $ | 473 | $ | 91,206 | ||||||||||||
Special mention/Watch | 291 | - | - | - | - | 291 | ||||||||||||||||||
Substandard | 1,627 | 526 | 1,117 | - | - | 3,270 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 36,384 | $ | 47,922 | $ | 9,036 | $ | 952 | $ | 473 | $ | 94,767 | ||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction | Commercial | |||||||||||||||||||||||
Residential | Commercial | and Land | Business | Consumer | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Pass | $ | 39,639 | $ | 45,136 | $ | 9,839 | $ | 876 | $ | 557 | $ | 96,047 | ||||||||||||
Special mention/Watch | 48 | - | - | - | - | 48 | ||||||||||||||||||
Substandard | 1,787 | 487 | 907 | 33 | - | 3,214 | ||||||||||||||||||
Doubtful | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 41,474 | $ | 45,623 | $ | 10,746 | $ | 909 | $ | 557 | $ | 99,309 | ||||||||||||
The Company evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis. No significant changes were made to either during the past year.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 2018 and December 31, 2017:
June 30, 2018 (Unaudited) | ||||||||||||||||||||||||||||
| Greater | Total Loans > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Than | Total | Total Loans | 90 Days & | |||||||||||||||||||||||
Past Due | Past Due | 90 Days | Past Due | Current | Receivable | Accruing | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | $ | 24 | $ | 280 | $ | 306 | $ | 610 | $ | 35,774 | $ | 36,384 | $ | - | ||||||||||||||
Commercial | - | - | - | - | 47,922 | 47,922 | - | |||||||||||||||||||||
Construction and land | - | - | - | - | 9,036 | 9,036 | - | |||||||||||||||||||||
Commercial business | - | - | - | - | 952 | 952 | - | |||||||||||||||||||||
Consumer | - | - | - | - | 473 | 473 | - | |||||||||||||||||||||
Total | $ | 24 | $ | 280 | $ | 306 | $ | 610 | $ | 94,157 | $ | 94,767 | $ | - | ||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||
| Greater | Total Loans > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | Than | Total | Total Loans | 90 Days & | |||||||||||||||||||||||
Past Due | Past Due | 90 Days | Past Due | Current | Receivable | Accruing | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | $ | 73 | $ | 196 | $ | - | $ | 269 | $ | 41,205 | $ | 41,474 | $ | - | ||||||||||||||
Commercial | - | - | - | - | 45,623 | 45,623 | - | |||||||||||||||||||||
Construction and land | - | - | - | - | 10,746 | 10,746 | - | |||||||||||||||||||||
Commercial business | - | - | - | - | 909 | 909 | - | |||||||||||||||||||||
Consumer | - | - | - | - | 557 | 557 | ||||||||||||||||||||||
Total | $ | 73 | $ | 196 | $ | - | $ | 269 | $ | 99,040 | $ | 99,309 | $ | - | ||||||||||||||
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming multi-family and commercial loans but also include loans modified in troubled debt restructurings.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
The following table presents impaired loans as of June 30, 2018 and for the three and six month periods ended June 30, 2018 and 2017:
As of | As of and for the Three Months Ended | |||||||||||||||||||||||||||
June 30, 2018 | June 30, 2018 | June 30, 2017 | ||||||||||||||||||||||||||
Unpaid | Average Balance of | Interest | Average Balance of | Interest | ||||||||||||||||||||||||
Recorded Balance | Principal Balance | Specific Allowance | Impaired | Income Recognized | Impaired | Income Recognized | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | $ | 1,982 | $ | 2,155 | $ | - | $ | 2,077 | $ | 14 | $ | 1,002 | $ | 32 | ||||||||||||||
Commercial | 38 | 38 | - | 38 | 1 | 34 | - | |||||||||||||||||||||
Construction and land | 2,465 | 2,538 | - | 2,475 | 22 | 1,682 | 21 | |||||||||||||||||||||
Commercial business | - | - | - | - | - | |||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | |||||||||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial | - | - | - | - | - | - | - | |||||||||||||||||||||
Construction and land | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial business | - | - | - | - | - | - | - | |||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | |||||||||||||||||||||
Totals | $ | 4,485 | $ | 4,731 | $ | - | $ | 4,590 | $ | 37 | $ | 2,718 | $ | 53 | ||||||||||||||
| As of | As of and for the Six Months Ended | |||||||||||||||||||||||||||
| June 30, 2018 | June 30, 2018 | June 30, 2017 | ||||||||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Balance of Impaired | Interest Income Recognized | Average Balance of Impaired | Interest Income Recognized | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Loans without a specific valuation allowance: | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | $ | 1,982 | $ | 2,155 | $ | - | $ | 706 | $ | 28 | $ | 964 | $ | 28 | ||||||||||||||
Commercial | 38 | 38 | - | 37 | 1 | 34 | 1 | |||||||||||||||||||||
Construction and land | 2,465 | 2,538 | - | 2,421 | 46 | 1,691 | 46 | |||||||||||||||||||||
Commercial business | - | - | - | - | - | - | - | |||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | |||||||||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Residential | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial | - | - | - | - | - | - | - | |||||||||||||||||||||
Construction and land | - | - | - | - | - | - | - | |||||||||||||||||||||
Commercial business | - | - | - | - | - | - | - | |||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | |||||||||||||||||||||
Totals | $ | 4,485 | $ | 4,731 | $ | - | $ | 3,164 | $ | 75 | $ | 2,689 | $ | 75 | ||||||||||||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
The following table presents impaired loans as of December 31, 2017:
As of and for the year ended December 31, 2017 | ||||||||||||||||||||
Unpaid | Average Balance of | Interest | ||||||||||||||||||
Recorded Balance | Principal Balance | Specific Allowance | Impaired | Income Recognized | ||||||||||||||||
| (In thousands) | |||||||||||||||||||
| Loans without a specific valuation allowance: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Residential | ||||||||||||||||||||
Commercial | $ | 2,294 | $ | 2,439 | $ | - | $ | 2,166 | $ | 73 | ||||||||||
Construction and land | 33 | 33 | - | 35 | 2 | |||||||||||||||
Commercial business | 2,312 | 2,323 | - | 1,799 | 90 | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
| - | - | - | - | - | ||||||||||||||||
Loans with a specific valuation allowance: | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Residential | ||||||||||||||||||||
Commercial | - | - | - | - | - | |||||||||||||||
Construction and land | - | - | - | - | - | |||||||||||||||
Commercial business | - | - | - | - | - | |||||||||||||||
Consumer | - | - | - | - | - | |||||||||||||||
| - | - | - | - | - | ||||||||||||||||
Totals | ||||||||||||||||||||
| $ | 4,639 | $ | 4,795 | $ | - | $ | 4,000 | $ | 165 | |||||||||||
The following table presents the Company’s nonaccrual loans at June 30, 2018 and December 31, 2017. The table excludes performing troubled debt restructurings.
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Real estate loans | ||||||||
Residential | $ | 1,692 | $ | 1,629 | ||||
Commercial | - | - | ||||||
Construction and land | 943 | 728 | ||||||
Commercial business | - | - | ||||||
Consumer and other | - | - | ||||||
Total nonaccrual | $ | 2,635 | $ | 2,357 | ||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
At June 30, 2018 (unaudited) and December 31, 2017, the Company had certain loans that were modified in troubled debt restructurings (TDRs) and impaired. The modification of terms of such loans generally included one or a combination of the following: an extension of the maturity date or a reduction of the stated interest rate.
During the three and six months ended June 30, 2018 and 2017, there were no new loan modifications classified as TDRs.
The Company had no TDRs modified in the twelve months ended June 30, 2018 and 2017 that subsequently defaulted. A loan is considered to be in payment default once it is 30 days contractually past due under the loan’s modified terms.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.
The Company had $194,000 of residential real estate in the process of foreclosure at June 30, 2018 and no loans in the process of foreclosure at December 31, 2017.
Note 4: Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the 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 the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
At June 30, 2018 and December 31, 2017, quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below), of total capital, Tier 1 capital and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital to average total assets.
Basel III was effective for the Company on January 1, 2015. Basel III requires the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital to risk weighted assets, as defined in the regulation. Under the new Basel III rules, in order to avoid limitations on capital distributions, including dividends, the Company must hold a capital conservation buffer above the adequately capitalized common equity Tier 1 capital to risk-weighted assets ratio. The capital conservation buffer is being phased in from zero percent to 2.50 percent by 2019. Under Basel III, the Company and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Management believes, as of June 30, 2018 (unaudited) and December 31, 2017, that the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2018 (unaudited) and December 31, 2017, the most recent notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios are presented in the following table:
Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
As of June 30, 2018 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 15,658 | 16.9 | % | $ | 7,399 | 8.0 | % | $ | 9,249 | 10.0 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | $ | 14,583 | 15.8 | % | $ | 5,549 | 6.0 | % | $ | 7,399 | 8.0 | % | ||||||||||||
Common Equity Tier I Capital (to Risk-Weighted Assets) | $ | 14,583 | 15.8 | % | $ | 4,162 | 4.5 | % | $ | 6,012 | 6.5 | % | ||||||||||||
Tier I Leverage Capital (to Average Total Assets) | $ | 14,583 | 12.3 | % | $ | 4,739 | 4.0 | % | $ | 5,924 | 5.0 | % | ||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 15,094 | 16.3 | % | $ | 7,694 | 8.0 | % | $ | 9,243 | 10.0 | % | ||||||||||||
Tier I Capital (to Risk-Weighted Assets) | $ | 13,971 | 15.1 | % | $ | 5,546 | 6.0 | % | $ | 7,394 | 8.0 | % | ||||||||||||
Common Equity Tier I Capital (to Risk-Weighted Assets) | $ | 13,971 | 15.1 | % | $ | 4,159 | 4.5 | % | $ | 6,008 | 6.5 | % | ||||||||||||
Tier I Capital (to Total Assets) | $ | 13,971 | 11.3 | % | $ | 4,933 | 4.0 | % | $ | 6,116 | 5.0 | % | ||||||||||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Note 5: Disclosures about Fair Value of Assets and Liabilities
Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
Level 2 | Significant other 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. |
Level 3 | Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Nonrecurring Measurements
The Company had no assets measured at fair value on a non-recurring basis for the periods ending June 30, 2018 and December 31, 2017.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Fair Value of Financial Instruments
The following table presents the estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2018 and December 31, 2017.
Fair Value Measurement Using | ||||||||||||||||||||
Carrying Value | Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
June 30, 2018 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 1,757 | $ | 1,757 | $ | 1,757 | $ | - | $ | - | ||||||||||
Interest-earning demand deposits | 3,439 | 3,439 | 3,439 | - | - | |||||||||||||||
Federal funds sold | 12,269 | 12,269 | 12,269 | - | - | |||||||||||||||
Loans, net | 92,415 | 91,580 | - | - | 91,580 | |||||||||||||||
Federal Home Loan Bank stock | 468 | 468 | - | 468 | - | |||||||||||||||
Accrued interest receivable | 259 | 259 | - | 259 | - | |||||||||||||||
Servicing rights | 1,144 | 1,144 | - | - | 1,144 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 93,239 | 92,390 | 57,985 | 34,405 | - | |||||||||||||||
Advances from the Federal Home Loan Bank | 9,027 | 8,966 | - | 8,966 | - | |||||||||||||||
Accrued interest payable | 15 | 15 | - | 15 | - | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 1,085 | $ | 1,085 | $ | 1,085 | $ | - | $ | - | ||||||||||
Interest-earning demand deposits | 2,997 | 2,997 | 2,997 | - | - | |||||||||||||||
Federal funds sold | 11,711 | 11,711 | 11,711 | |||||||||||||||||
Interest-earning time deposits in banks | 744 | 744 | - | 744 | - | |||||||||||||||
Loans and loans held for sale, net | 100,746 | 100,273 | - | - | 100,273 | |||||||||||||||
Federal Home Loan Bank stock | 468 | 468 | - | 468 | - | |||||||||||||||
Accrued interest receivable | 267 | 267 | - | 267 | - | |||||||||||||||
Servicing rights | 937 | 937 | - | - | 937 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 101,688 | 101,603 | 61,767 | 39,836 | - | |||||||||||||||
Advances from the Federal Home Loan Bank | 9,027 | 9,024 | - | 9,024 | - | |||||||||||||||
Accrued interest payable | 30 | 30 | - | 30 | - | |||||||||||||||
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and Due from Banks, Interest-earning Demand Deposits and Federal Funds Sold
The carrying amount approximates fair value.
Interest-earning Time Deposits in Banks
The carrying amount approximates fair value.
Loans and Loans Held for Sale
Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with nonperformance, illiquidity, and the structure and term of the loans along with local economic and market conditions.
Federal Home Loan Bank Stock
Fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.
Accrued Interest Receivable and Payable
The carrying amount approximates fair value. The carrying amount is determined using the interest rate, balance and last payment date.
Servicing Rights
Servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate.
Deposits
Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were obtained from a knowledgeable independent third party and reviewed by the Bank. The rates were the average of current rates offered by local competitors of the Bank.
The estimated fair value of demand, NOW, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Federal Home Loan Bank Advances
Fair value is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by the Federal Home Loan Bank.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
Note 6: Recent Accounting Pronouncements
The Company is an emerging growth company and as such will be subject to the effective dates noted for the private companies if they differ from the effective dates noted for public companies.
FASB ASU 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March, 2016 the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-02-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.
As an emerging growth company, these amendments are effective for annual reporting periods beginning after December 31, 2018, and for interim periods within annual periods beginning after December 15, 2019. The Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09. The Company is continuing to evaluate the impact of adopting ASU 2014-09, but does not expect the impact to have a material impact on the Company’s financial position or results of operations.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments in ASU 2016-01 are effective, as to the Company, for fiscal years beginning after December 15, 2018.
Management does not expect the adoption of ASU 2016-01 to have a material impact on the Company's financial position or results of operations.
FASB ASU 2016-02, Leases
In February 2016 the FASB issued ASU 2016-02, “Leases”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers”.
The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.
The amendments in ASU 2016-02 are effective, as to the Company, for years beginning after December 15, 2019, and for interim periods for years beginning after January 1, 2020. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
FASB ASU 2016-09, Share-Based Payments.
In March 2016, the FASB issued ASU 2016-09 “Share-Based Payments.” The guidance in this ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.
For emerging growth companies, the amendments are effective for annual periods beginning after December 15, 2017 and interim periods beginning after December 31, 2018. Management does not expect to make material changes to its accounting for share-based payments and implementation of ASU 2016-09 is not expected to have a material impact on the Company’s financial position and results of operations. Additionally, the Company’s share-based compensation plan awards have been classified as equity awards, whereby available elections to switch to intrinsic value measurement do not apply.
FASB ASU 2016-13, Financial Instruments – Credit Losses
In June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. The amendments in this Update replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required. ASU No. 2016-13 is effective, as to the Company, for years beginning after December 15, 2019, and interim periods within those years. Management expects that the implementation of ASU No. 2016-13 may increase the balance of the allowance for loan losses and is continuing to evaluate the potential impact on the Company's results of operations and financial position.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Note 7: Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares shares outstanding for basic and diluted EPS calculations until they are committed to be released.
Basic earnings per share for the three and six months ended June 30, 2018, were calculated using average shares 719,531 less unallocated average shares held by ESOP of 46,530 and 47,138 for each respective period. The Company had no dilutive or potentially dilutive securities at June 30, 2017.
Calculations of earnings per share for the three and six months ended June 30, 2018 is as follows:
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||
Net | Average | Per Share | Net | Average | Per Share | |||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
Net income | $ | 147 | $ | 387 | ||||||||||||||||||||
Basic earnings per share | 649,914 | $ | 0.23 | 649,640 | $ | 0.60 | ||||||||||||||||||
Effect of dilutive securities | ||||||||||||||||||||||||
Stock options | 9,114 | 9,820 | ||||||||||||||||||||||
Restricted stock awards | 9,202 | 9,284 | ||||||||||||||||||||||
Diluted earnings per share | 668,230 | $ | 0.22 | 668,744 | $ | 0.58 | ||||||||||||||||||
Note 8: Employee Stock Ownership Plan
As part of the Company’s stock conversion, shares were purchased by the ESOP with a loan from New Bancorp. All employees of the Bank meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $15,000 and $23,000 for the three and six month periods ended June 30, 2018, respectively. Compensation expense related to the ESOP was $12,000 and $25,000 for the three and six month periods ended June 30, 2017, respectively.
The stock price at the formation date was $10.00. The aggregate fair value of the 47,235 unallocated shares was $921,100 based on the $19.50 closing price of our common stock on June 30, 2018.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Note 9: Equity Incentive Plan
In June 2017, the Company’s stockholders authorized the adoption of the New Bancorp, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). No more than 97,524 shares of the Company’s common stock may be issued under the 2017 Plan, of which a maximum of 69,660 may be issued pursuant to the exercise of stock options and 27,864 may be issued pursuant to restricted stock awards, restricted stock units and unrestricted share awards. Stock options awarded to employees may be incentive stock options or non-qualified stock options. The shares that may be issued may be authorized but unissued shares or treasury shares. The 2017 Plan permits the grant of incentive awards in the form of options, stock appreciation rights, restricted share and share unit awards, and performance share awards. The 2017 Plan contains annual and lifetime limits on certain types of awards to individual participants.
Awards may vest or become exercisable only upon the achievement of performance measures or based solely on the passage of time after award. Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).
On June 30, 2017, the Company made awards of restricted shares and granted stock options for 22,931 and 60,080 shares, respectively, to members of the Board of Directors and to certain members of management. The awards vest over a five year period and the stock options have a ten year period to expiration. Each option has an exercise price of $14.09 as determined on the grant date and expires 10 years from the grant date.
Stock Options
The table below represents the stock option activity for the six months ended June 30, 2018:
Remaining | ||||||||||||
Weighted-average | contractual | |||||||||||
Options | exercise price | life (years) | ||||||||||
Options outstanding at January 1, 2018 | 60,080 | $ | 14.09 | 9.5 | ||||||||
Granted | - | - | - | |||||||||
Exercised | - | - | - | |||||||||
Forfeited | (1,000 | ) | 14.09 | - | ||||||||
Expired | - | - | - | |||||||||
Options outstanding at June 30, 2018 | 59,080 | $ | 14.09 | 9.0 | ||||||||
As of June 30, 2018, the Company had $147,000 of unrecognized compensation expense related to stock options. The cost of stock options will be amortized over the five-year vesting period. The aggregate grant date fair value of the stock options granted in 2017 was $2.87 per share. The Company recognized $9,000 and $18,000 of compensation expense related to the stock options granted for the three and six months ended June 30, 2018, respectively.
New Bancorp, Inc.
Notes to Condensed Consolidated Financial Statements
Restricted Shares
Restricted shares are accounted for as fixed grants using the fair value of the Company's stock at the time of the grant. Unvested restricted shares may not be disposed of or transferred during the vesting period.
The table below presents the restricted stock award activity for the period shown:
Weighted-average | ||||||||
Restricted | grant date | |||||||
stock awards | fair value | |||||||
Non-vested at January 1, 2018 | 22,931 | $ | 14.09 | |||||
Granted | - | - | ||||||
Vested | 4,586 | - | ||||||
Forfeited | 500 | - | ||||||
Nonvested at June 30, 2018 | 17,845 | $ | 14.09 | |||||
As of June 30, 2018, the Company had $258,000 of unrecognized compensation expense related to restricted shares. The cost of the restricted shares is being amortized over the five-year vesting period. The Company recognized $16,000 and $33,000 of expense related to the restricted shares during the three and six months ended June 30, 2018, respectively.
Note 10: Change in Corporate Form
On October 19, 2015, the Bank converted into a federal stock savings bank and established a stock holding company, New Bancorp, Inc., as parent of the Bank.
The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to New Bancorp, Inc. The Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock pursuant to an independent valuation appraisal of the Bank and the Company. The stock was priced at $10.00 per share. In addition, the Bank’s board of directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering. The Conversion was completed on October 19, 2015 and resulted in the issuance of 696,600 common shares by the Company. The cost of the Conversion and issuing the capital stock totaled $1.2 million and was deducted from the proceeds of the offering.
In accordance with OCC regulations, at the time of the Conversion, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
The conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management’s discussion and analysis of the financial condition at June 30, 2018 and results of operations for the three- and six- months ended June 30, 2018 and 2017 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:
● | statements of our goals, intentions and expectations; |
● | statements regarding our business plans, prospects, growth and operating strategies; |
● | statements regarding the quality of our loan and investment portfolios; and |
● | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● | our ability to manage our operations in the event of adverse economic conditions nationally and in our market area; |
● | adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values); |
● | significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses; |
● | credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses; |
● | the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations; |
● | competition among depository and other financial institutions; our success in increasing our residential real estate and commercial real estate lending, and selling certain of our residential real estate loans; |
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
● | our ability to attract and maintain deposits and our success in introducing new financial products; |
● | our ability to improve our asset quality even as we increase our commercial real estate lending; |
● | changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources; |
● | fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area; |
● | changes in consumer spending, borrowing and savings habits; |
● | declines in the yield on our assets resulting from the current low interest rate environment; |
● | risks related to a high concentration of loans secured by real estate located in our market area; |
● | the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings; |
● | changes in the level of government support of housing finance; |
● | our ability to enter new markets successfully and capitalize on growth opportunities; |
● | changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes; |
● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Securities and Exchange Commission; |
● | changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans; |
● | loan delinquencies and changes in the underlying cash flows of our borrowers; |
● | our ability to control costs and expenses, particularly those associated with operating as a publicly traded company; |
● | the failure or security breaches of computer systems on which we depend; |
● | the ability of key third-party service providers to perform their obligations to us; |
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
● | changes in the financial condition or future prospects of issuers of securities that we own; and |
● | other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in New Bancorp, Inc.’s Annual Report on Form 10-K, as filed with the Securities and Exchange on April 2, 2018.
Comparison of Financial Condition at June 30, 2018 and December 31, 2017
Total Assets. Total assets were $119.5 million at June 30, 2018, a decrease of $7.3 million, or 5.8%, compared to December 31, 2017. The decrease was due primarily to a decrease of $8.3 million in loans and loans held for sale.
Loans and loans held for sale, net. Loans, net, decreased $8.3 million, or 8.3%, to $92.4 million at June 30, 2018 from $100.7 million at December 31, 2017. During the six months ended June 30, 2018, there were $13.1 million of loans originated, consisting primarily of $9.3 million of commercial real estate loans, $3.6 million of one-to four-family residential loans, and sold $12.1 million of loans. During the six months ended June 30, 2018, one- to four-family residential real estate loans decreased $5.0 million, or 12.3%, to $36.4 million at June 30, 2018, from December 31, 2017, while commercial real estate loans, increased $2.3 million, or 5.0%, to $47.9 million at June 30, 2018. During the six months ended June 30, 2018 $1.8 million of mortgage loans previously booked to the Bank were refinanced with the resulting loan sold in the secondary market for profit.
It remains our strategy to grow and diversify our loan portfolio, with an emphasis on increasing both commercial and residential loans. During 2016 the Company began to originate Small Business Administration (SBA) loans and increased its focus on commercial real estate loans, which represented a change from its historical focus on residential loans. Commercial loan originations during the six months ended June 30, 2018 included commercial real estate loans and commercial loans guaranteed by the SBA’s 7(a) program. The guaranteed portion of the SBA loans are subsequently sold, with servicing retained. We intend to continue to increase commercial lending, including SBA loans, in future periods. The Bank also engages in a program to sell certain fixed-rate, 30-year term mortgage loans in the secondary market. The Bank primarily sells loans on a servicing retained basis, in transactions with the Federal Home Loan Bank of Indianapolis, through its mortgage purchase program, and the Federal Home Loan Mortgage Corporation (FHLMC). The Bank also sells mortgage loans on a servicing released and wholesale basis, and during the six months ended June 30, 2018 included construction loans that were loans booked at December 31, 2017 and were then sold on the secondary market which earned noninterest income. Management intends to continue loan sales activity in future periods.
Bank Owned Life Insurance. At June 30, 2018, our investment in bank owned life insurance was $5.7 million, an increase of $85,000, over the balance at December 31, 2017. We invested in bank owned life insurance to provide us with a funding offset for certain benefit plan obligations. While these benefit plans have been terminated and the obligations have been paid, bank owned life insurance also generally provides us noninterest income that is non-taxable. Federal bank regulatory guidance cautions against an investment in bank owned life insurance that exceeds 25% of an institution’s Tier 1 capital. The guidance states that an institution which has an investment in bank owned life insurance exceeding this amount make a determination that the amount of investment does not constitute an imprudent capital concentration. We have not made additional contributions to bank owned life insurance since 2002.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Deposits. Deposits decreased $8.5 million, or 8.3%, to $93.2 million at June 30, 2018 from $101.7 million at December 31, 2017. Our core deposits decreased $3.8 million, or 6.1%, to $58.0 million at June 30, 2018 from $61.8 million at December 31, 2017. Certificates of deposit decreased $4.7 million, or 11.7%, to $35.2 million at June 30, 2018 from $39.9 million at December 31, 2017. During 2016, the Company implemented a strategy designed to promote growth in core deposits. Specifically the Company began to offer demand and savings accounts using the Kasasa program. The Kasasa program introduced interest-bearing demand accounts, and provides tiered interest rates in relation to customer activities, such as estatements and debit card swipes. In the first quarter of 2018, Bank instituted changes to the Kasasa product account terms which was designed to reduce the balance of accounts that were non-profitable which resulted in a decrease of our core deposits.
While the Bank is continually seeking growth in deposits, with an emphasis on core deposits, management has also elected to add certain listing service certificates of deposit to fund loan growth. These listing service deposits in certificates totaled $7.4 million and $11.7 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 maturities of these accounts ranged from less than one year to greater than three years and the average cost was 1.67%. Additionally, at June 30, 2018, the Company held $2.0 million of brokered certificates of deposit with maturities ranging from less than one year to 2 years at an average cost of 2.07%, compared to $3.0 million as of December 31, 2017 at an average cost of 1.67%. An additional listing service was added during 2017 for money market accounts which totaled $9.0 million at June 30, 2018. Management intends to continue to focus its efforts on increasing core deposits, with a special emphasis on growth in consumer and business demand deposits.
Borrowings. Federal Home Loan Bank advances totaled $9.0 million at both June 30, 2018 and December 31, 2017. The aggregate cost of outstanding advances from the Federal Home Loan Bank was 1.77% at June 30, 2018, compared to the Bank’s cost of deposits of 0.99% at that date.
Total Equity. Total equity increased $438,000, or 2.9%, to $15.8 million at June 30, 2018 compared to December 31, 2017. The increase resulted primarily from net income of $387,000 during the six months ended June 30, 2018.
Comparison of Operating Results for the Three Months Ended June 30, 2018 and 2017
General. Net income for the three months ended June 30, 2018 was $147,000, compared to net income of $499,000 for the three months ended June 30, 2017. This decrease was due primarily to a $474,000 decrease in non-interest income, which was partially offset by a $144,000 increase in interest income.
Interest Income. Interest income increased $144,000, or 13.2%, to $1.2 million for the three months ended June 30, 2018 from $1.1 million for the three months ended June 30, 2017. This increase was primarily attributable to a $123,000 increase in interest on loans receivable, and a $21,000 increase in interest on other interest-earning deposits. The average balance of loans during the three months ended June 30, 2018 increased $3.2 million, or 4.3%, to $95.1 million from $91.4 million for the three months ended June 30, 2017, while the average yield on loans increased thirty three basis points to 4.93%. The average balance of other interest-earning deposits, including certificates of deposit in other banks and federal funds sold, decreased $3.3 million to $12.9 million for the three months ended June 30, 2018 from $16.2 million for the three months ended June 30, 2017.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense. Total interest expense increased $6,000, or 2.4%, to $256,000 for the three months ended June 30, 2018 from $250,000 for the three months ended June 30, 2017. Interest expense on deposits increased $5,000, or 2.4%, to $216,000 for the three months ended June 30, 2018 from $211,000 for the three months ended June 30, 2017. The increase was primarily due to an increase in the average balance of deposits of $5.1 million, while the average cost of deposits increased six basis points to 1.01%. Interest expense on borrowings decreased $4,000, to $40,000 for the three months ended June 30, 2018 from $44,000 for the three months ended June 30, 2017, The decrease was due primarily to a $1.0 million decrease in the average balance outstanding.
Net Interest Income. Net interest income increased $138,000, or 16.4%, to $977,000 for the three months ended June 30, 2018 compared to $839,000 for the three months ended June 30, 2017. The increase was due to a 57 basis points increase in our interest rate spread to 3.49% for the three months ended June 30, 2018 from 2.92% for the three months ended June 30, 2017. Our net interest margin increased to 3.62% for the three months ended June 30, 2018 from 3.11% for the three months ended June 30, 2017 and average loans increasing to $95.2 million from $91.4 million for the respective period.
Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses"in our Annual Report on 10-K, we had no provisions for loan losses for the three months ended June 30, 2018, compared to $31,000 provision recorded for the three months ended June 30, 2017. The allowance for loan losses was $1.1 million, or 1.15% of total loans, at June 30, 2018, compared to $1.0 million, or 1.13% of total loans, at June 30, 2017. Total nonperforming loans were $2.6 million at June 30, 2018 which includes a relationship totaling $1.8 million that was moved to non accrual in the fourth quarter ending December 31, 2017, compared to $617,000 at June 30, 2017. The loans making up the $1.8 million relationship are current as to payments and management believes these loans to be adequately collateralized with no loss expected. Classified (substandard, doubtful and loss) loans were $3.2 million at June 30, 2018 and $3.4 million at June 30, 2017, and total loans past due greater than 30 days were $610,000 and $175,000 at those respective dates. We had net recoveries of $1,000 during the three months ended June 30, 2018 and recoveries of $31,000 for the three months ended June 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 40.8% at June 30, 2018 compared to 238.9% at June 30, 2017.
The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at June 30, 2018 and 2017. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.
Non-Interest Income. Non-interest income decreased $474,000, or 52.9%, to $423,000 for the three months ended June 30, 2018 from $897,000 for the three months ended June 30, 2017. The increase was primarily due to a decrease of $441,000 in gains on sales of loans. The gain on sales of loans amounted to $284,000 during the three months ended June 30, 2018, compared to $725,000 in the year earlier period, due primarily to a decrease in the volume of SBA loan sales.
Non-Interest Expense. Non-interest expense increased $47,000, or 3.9%, to $1.3 million for the three months ended June 30, 2018 compared to $1.2 million for the three months ended June 30, 2017. The increase was due primarily to an $87,000, or 79.0%, increase in other expenses which included a $37,000 charge for reimbursement of funds to a Bank depositor, due to an external debit card fraud loss.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Federal Income Taxes. The Company did not record a federal income tax provision during either of the three month periods ended June 30, 2018 and 2017. The federal income tax provision was affected by the full impairment valuation allowance recorded on the Company’s net deferred tax assets in both 2018 and 2017. Management evaluated the deferred tax asset based upon a projection of future operating results and determined that a full impairment valuation allowance was required at both June 30, 2018 and 2017. The Bank has a total valuation allowance on its net deferred tax assets of $2.6 million at June 30, 2018. The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize and maintain profitable results of operations.
Comparison of Operating Results for the Six Months Ended June 30, 2018 and 2017
General. Net income for the six months ended June 30, 2018 was $387,000, a decrease of $93,000, or 19.4%, compared to net income of $480,000 for the six months ended June 30, 2017. The decrease was primarily due to a $334,000 decrease in noninterest income, and an increase in noninterest expenses of $194,000, which were partially offset by a $353,000 increase in net interest income.
Interest Income. Interest income increased $411,000, or 20.2%, to $2.5 million for the six months ended June 30, 2018 from $2.0 million for the six months ended June 30, 2017. This increase was attributable to a $353,000 increase in interest on loans receivable and a $58,000 increase in interest on other interest-earning deposits. The average balance of loans during the six months ended June 30, 2018, increased $7.8 million, or 8.8%, to $96.6 million from $88.7 million for the six months ended June 30, 2017, while the average yield on loans increased 37 basis points to 4.84% for the six months ended June 30, 2018 from 4.47% for the six months ended June 30, 2017 reflecting rising market interest rates. The average balance of other interest-earning assets, including certificates of deposit in other banks and federal funds sold, increased $773,000 to $13.4 million for the six months ended June 30, 2018 from $12.6 million for the six months ended June 30, 2017, while the average yield increased 37 basis points to 1.70% for the six months ended June 30, 2018 from 0.89% for the six months ended June 30, 2017.
Interest Expense. Total interest expense increased $57,000, or 12.5%, to $512,000 for the six months ended June 30, 2018 from $455,000 for the six months ended June 30, 2017. Interest expense on deposit accounts increased $55,000, or 14.6%, to $432,000 for the six months ended June 30, 2017 from $377,000 for the six months ended June 30, 2017. The increase was primarily due to an increase in the average balance of money market accounts of $8.5 million for the six months ended June 30, 2018 with an average yield increase of 73 basis points to 0.86% for the six months ended June 30, 2018 from 0.13% for the six months ended June 30, 2017.
Net Interest Income. Net interest income increased $354,000, or 22.4%, to $1.9 million for the six months ended June 30, 2018 compared to $1.6 million for the six months ended June 30, 2017. The increase was due to an increase in our net interest margin to 3.52% for the six months ended June 30, 2018 from 3.11% for the six months ended June 30, 2017 and to average loans increasing to $96.6 million from $88.8 million for the respective period.
Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses" in our Annual Report on Form 10-K, we recorded a $50,000 credit provision for loan losses for the six months ended June 30, 2018, compared to a $31,000 provision for the six months ended June 30, 2017. The allowance for loan losses was $1.1 million, or 1.15% of total loans, at June 30, 2018, compared to $1.0 million, or 1.13% of total loans, at June 30, 2017. Total nonperforming loans were $2.6 million at June 30, 2018 which includes a relationship totaling $1.8 million that was moved to non accrual in the fourth quarter ending December 31, 2017, compared to $455,000 at June 30, 2017. The loans making up the $1.8 million relationship are current as to payments and management believes these loans to be adequately collateralized with no loss expected. Classified (substandard, doubtful and loss) loans were $3.2 million at June 30, 2018 and $3.4 million at June 30, 2017, and total loans past due greater than 30 days were $610,000 and $175,000 at those respective dates. We had a recovery of $2,000 for the six months ending June 30, 2018 and $8,000 in net charge-offs during the six months ended June 30, 2017. As a percentage of nonperforming loans, the allowance for loan losses was 40.8% at June 30, 2018 compared to 238.9% at June 30, 2017.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at June 30, 2018 and December 31, 2017. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.
Non-Interest Income. Non-interest income decreased $334,000, or 26.2%, to $939,000 for the six months ended June 30, 2018 from $1.3 million for the six months ended June 30, 2017. The decrease was primarily due to a decrease of $273,000 in gains on sales of loans to $666,000 in the six months ended June 30, 2018, compared to $939,000 in the year earlier period. During the six months ended June 30, 2018, the Company originated $7.4 million of SBA loans and sold $5.5 million of these loans. These sales resulted in gains on sale of $626,000, compared to $939,000 in gain on sales of SBA loans for $12.5 million originated and $11.7 million sold for the six months ended June 30, 2017.
Non-Interest Expense. Non-interest expense increased $194,000, or 8.3%, to $2.5 million for the six months ended June 30, 2018 compared to $2.3 million for the six months ended June 30, 2017. The increase was due primarily to a $116,000, or 44.3%, increase in other expenses, an increase in salaries and employee benefits of $50,000, or 3.8%, and a $49,000, or 19.5%, increase in professional services. Other expenses increase included a $37,000 charge for reimbursement of funds to a Bank depositor due to an external debit card fraud loss which we anticipate will be partially offset by an insurance claim, an increase in expenses for SBA to explore new industries of $16,000, and underwriting expenses for SBA totaling $12,000 more than the previous period six months ended June 30, 2017. The Bank also upgraded its IT security features which costs $10,000. The increase in salaries and employee benefits was due primarily to the addition of new benefits plans including the stock equity incentive benefit plan. Professional services increased primarily due to bringing in a process efficiency professional to streamline processes, train retail staff, and coach customer service for $30,000.
Federal Income Taxes. We did not record a federal income tax provision during either of the six month periods ended June 30, 2018 and 2017. The federal income tax provision was affected by the full impairment valuation allowance recorded on our net deferred tax assets in both the 2018 and 2017 periods. Management evaluated the deferred tax asset based upon a projection of future operating results and determined that a full impairment valuation allowance was required at both June 30, 2018 and 2017. We had a total valuation allowance on its net deferred tax assets of $2.6 million at June 30, 2018. The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize, maintain, and project profitable results of operations.
Liquidity and Capital Resources
Our primary sources of funds are deposits, principal and interest payments on loans, and proceeds from the sale of loans and advances from the FHLB-Indianapolis. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $4.3 million and $732,000 for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable was $5.8 million and $(7.3 million) for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by (used in) financing activities, which is comprised of net change in deposits, was $(8.5 million) and $17.7 million for the six months ended June 30, 2018 and 2017, respectively.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
At June 30, 2018, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $14.6 million, or 12.3% of adjusted average assets, which is above the required level of $4.7 million or 4.0%; total risk-based capital of $15.7 million, or 16.9% of risk-weighted assets, which is above the required level of $7.4 million, or 8.0%; and common equity Tier 1 capital of $14.6 million, or 15.8% of risk-weighted assets, which is above the required level of $4.1 million, or 4.5% of risk-weighted assets. Accordingly, New Buffalo Savings Bank was categorized as well capitalized at June 30, 2018. Management is not aware of any conditions or events since the most recent notification that would change our category.
At June 30, 2018, we had $7.0 million in outstanding commitments to originate loans and lines of credit of $12.6 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from June 30, 2018 totaled $17.8 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB-Indianapolis advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
New Bancorp, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk |
Not applicable, as the Registrant is a smaller reporting company.
Controls and Procedures |
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2018. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the quarter ended June 30, 2018, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
Legal Proceedings |
The Bank is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.
Risk Factors |
Not applicable, as the Registrant is a smaller reporting company.
Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | There were no sales of unregistered securities during the period covered by this Report. |
(b) | Not applicable. |
(c) | There were no issuer repurchases of securities during the period covered by this Report. |
Defaults Upon Senior Securities |
None.
Mine Safety Disclosures |
Not applicable.
Other Information |
None.
Exhibits |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
32 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEW BANCORP, INC. | ||
Date: August 14, 2018 | /s/ Richard C. Sauerman | |
Richard C. Sauerman | ||
President and Chief Executive Officer | ||
Date: August 14, 2018 | /s/ Shawna L. Zawada | |
Shawna L. Zawada | ||
Chief Financial Officer |
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