10-Q 1 npbs10q051117.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

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

 

For the transition period from ____________ to _____________

 

Commission file number: 000-33411

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

     

Virginia

(State or other jurisdiction of

incorporation or organization)

 

 

31-1804543

(I.R.S. Employer

Identification No.)

 
       

67 Commerce Drive

Honaker, Virginia

(Address of principal executive offices)

 

 

24260

(Zip Code)

 
         

 

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

 

 

n/a

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X]   No [ ]

 

 

 
 

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

 

Yes [X]   No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     
Large accelerated filer  [ ]   Accelerated filer  [ ]
Non-accelerated filer  [ ]   Smaller reporting company  [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes [ ]   No [X]

 

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

     
Class   Outstanding at May 12, 2017
Common Stock, $2.00 par value   23,355,457

 

 

 
 

NEW PEOPLES BANKSHARES, INC.

 

        INDEX        
                 
                Page
PART I FINANCIAL INFORMATION          
Item 1. Financial Statements            
Consolidated Statements of Income – Three Months      
Ended March 31, 2017 and 2016 (Unaudited)       1
Consolidated Statements of Comprehensive Income – Three Months    
Ended March 31, 2017 and 2016 (Unaudited)       3
Consolidated Balance Sheets – March 31, 2017 (Unaudited) and December 31, 2016 4
                 
Consolidated Statements of Changes in Stockholders’ Equity -     
Three Months Ended March 31, 2017 and 2016 (Unaudited)     6
                 
Consolidated Statements of Cash Flows – Three Months      
Ended March 31, 2017 and 2016 (Unaudited)       7
                 
Notes to Consolidated Financial Statements       9
                 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
                 
Item 3.    Quantitative and Qualitative Disclosures about Market Risk     32
                 
Item 4.    Controls and Procedures         32
                 
PART II   OTHER INFORMATION          
                 
Item 1.     Legal Proceedings           33
                 
Item 1A.    Risk Factors           33
                 
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds   33
                 
Item 3.     Defaults upon Senior Securities         33
                 
Item 4.     Mine Safety Disclosures         33
                 
Item 5.     Other Information           33
                 
Item 6.     Exhibits             33
                 
SIGNATURES             34

 

 
 

Part I Financial Information

Item 1Financial Statements

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

       
INTEREST AND DIVIDEND INCOME  2017  2016
Loans including fees  $5,664   $5,565 
Interest-earning deposits with banks   43    21 
Investments   350    464 
Dividends on equity securities (restricted)   32    32 
Total Interest and Dividend Income   6,089    6,082 
           
INTEREST EXPENSE          
Deposits          
  Demand   13    11 
  Savings   47    41 
  Time deposits below $100,000   289    265 
  Time deposits above $100,000   189    154 
FHLB advances   45    36 
Federal funds purchased   —      2 
Trust preferred securities   141    122 
Total Interest Expense   724    631 
           
NET INTEREST INCOME   5,365    5,451 
           
PROVISION FOR LOAN LOSSES   —      —   
           
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   5,365    5,451 
           
NONINTEREST INCOME          
Service charges   833    488 
Fees, commissions and other income   802    805 
Insurance and investment fees   52    158 
Net realized gains on sale of investment securities   —      105 
Life insurance investment income   27    30 
Total Noninterest Income   1,714    1,586 
           

 

 

NONINTEREST EXPENSES          
Salaries and employee benefits   3,381    3,210 
Occupancy and equipment expense   1,127    853 
Advertising and public relations   93    104 
Data processing and telecommunications   553    581 
FDIC insurance premiums   102    134 
Other real estate owned and repossessed vehicles, net   300    163 
Other operating expenses   1,422    1,292 
Total Noninterest Expenses   6,978    6,337 
           
INCOME BEFORE INCOME TAXES   101    700 
           
INCOME TAX EXPENSE (BENEFIT)   (14)   2 
           
NET INCOME  $115   $698 
           
Income Per Share          
Basic  $0.00   $0.03 
Fully Diluted  $0.00   $0.03 
           
Average Weighted Shares of Common Stock          
Basic   23,354,890    23,354,082 
Fully Diluted   23,354,890    23,354,082 

 

The accompanying notes are an integral part of this statement. 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

 

   2017  2016
       
NET INCOME  $115   $698 
           
Other comprehensive income:          
  Investment Securities Activity          
    Unrealized gains arising during the period   89    785 
    Tax related to unrealized gains   (30)   (267)
    Reclassification of realized gains during the period   —      (105)
    Tax related to realized gains   —      36 
TOTAL OTHER COMPREHENSIVE INCOME   59    449 
TOTAL COMPREHENSIVE INCOME  $174   $1,147 

 

 

 The accompanying notes are an integral part of this statement.

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

       
ASSETS  March 31,  December 31,
   2017  2016
    (Unaudited)    (Audited) 
           
Cash and due from banks  $17,924   $18,500 
Interest-bearing deposits with banks   21,664    16,816 
Federal funds sold   108    132 
Total Cash and Cash Equivalents   39,696    35,448 
           
Investment securities available-for-sale   72,010    70,011 
           
Loans receivable   476,490    468,629 
Allowance for loan losses   (5,968)   (6,072)
Net Loans   470,522    462,557 
           
Bank premises and equipment, net   29,937    29,985 
Equity securities (restricted)   2,585    2,802 
Other real estate owned   10,161    10,655 
Accrued interest receivable   1,734    1,848 
Life insurance investments   12,301    12,274 
Deferred taxes, net   5,255    5,285 
Other assets   3,393    3,470 
           
Total Assets  $647,594   $634,335 
           
LIABILITIES          
           
Deposits:          
Demand deposits:          
Noninterest bearing  $159,301   $151,914 
Interest-bearing   41,663    40,213 
Savings deposits   123,403    114,492 
Time deposits   248,384    247,819 
        Total Deposits   572,751    554,438 
           
Federal Home Loan Bank advances   8,458    13,758 
Accrued interest payable   342    331 
Accrued expenses and other liabilities   2,455    2,395 
Trust preferred securities   16,496    16,496 
           
Total Liabilities   600,502    587,418 
           
Commitments and contingencies          
           

 

 

STOCKHOLDERS’ EQUITY          
           
Common stock - $2.00 par value; 50,000,000 shares authorized;          
23,355,457 and 23,354,457 shares issued and outstanding at
March 31, 2017 and December 31, 2016, respectively
   46,711    46,709 
Common stock warrants   763    764 
Additional paid-in-capital   13,965    13,965 
Retained deficit   (13,950)   (14,065)
Accumulated other comprehensive loss   (397)   (456)
           
Total Stockholders’ Equity   47,092    46,917 
           
Total Liabilities and Stockholders’ Equity  $647,594   $634,335 

  

 

The accompanying notes are an integral part of this statement.

 


NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

                      
   Shares of Common Stock  Common Stock  Common Stock Warrants  Additional Paid-in- Capital  Retained Earnings (Deficit) 

Accum-ulated Other

Compre-hensive Income (Loss)

  Total Stockholders’ Equity
                      
Balance, December 31, 2015   23,354   $46,708   $764   $13,965   $(15,023)  $(327)  $46,087 
                                    
Net income   —      —      —      —      698    —      698 
                                    
Other comprehensive income,
net of tax
   —      —      —      —      —      449    449 
Balance, March 31, 2016   23,354   $46,708   $764   $13,965   $(14,325)  $122   $47,234 
                                    
Balance, December 31, 2016   23,354   $46,709   $764   $13,965   $(14,065)  $(456)  $46,917 
                                    
Net income   —      —      —      —      115    —      115 
                                    
Exercise of common
stock warrants
   1    2    (1)   —      —      —      1 
                                    
Other comprehensive income,
net of tax
   —      —      —      —      —      59    59 
Balance, March 31, 2017   23,355   $46,711   $763   $13,965   $(13,950)  $(397)  $47,092 
                                    

 

 The accompanying notes are an integral part of this statement.

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

 

   2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $115   $698 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Depreciation   638    551 
Income on life insurance   (27)   (30)
Gain on sale of securities available-for-sale   —      (105)
Gain on sale of premises and equipment   (1)   —   
Gain on sale of foreclosed assets   (24)   (43)
Adjustment of carrying value of foreclosed real estate   176    (4)
Accretion of bond premiums/discounts   201    253 
Deferred tax benefit   —      (70)
Net change in:          
Interest receivable   114    22 
Other assets   77    (1,407)
Accrued interest payable   11    (1)
Accrued expenses and other liabilities   60    2,518 
Net Cash Provided by Operating Activities   1,340    2,382 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Net increase in loans   (8,777)   (10,233)
Purchase of securities available-for-sale   (6,564)   (100)
Proceeds from sale and maturities of securities available-for-sale   4,453    17,564 
Net sale (purchase) of equity securities (restricted)   217    (314)
Payments for the purchase of premises and equipment   (593)   (3,215)
Proceeds from sale of premises and equipment   4    —   
Proceeds from sales of other real estate owned   1,154    68 
Net Cash Provided by (Used in) Investing Activities   (10,106)   3,770 
           

 

 

CASH FLOWS FROM FINANCING ACTIVITIES          
Exercise of common stock warrants   1    —   
Net increase (decrease) in Federal Home Loan Bank advances   (5,300)   9,700 
Net change in:          
Demand deposits   8,837    10,696 
Savings deposits   8,911    (7,816)
Time deposits   565    (5,683)
Net Cash Provided by Financing Activities   13,014    6,897 
           
Net increase in cash and cash equivalents   4,248    13,049 
Cash and Cash Equivalents, Beginning of Period   35,448    26,338 
Cash and Cash Equivalents, End of Period   $39,696   $39,387 
           
Supplemental Disclosure of Cash Paid During the Period for:          
     Interest  $713   $632 
     Taxes  $—     $70 
           
Supplemental Disclosure of Non Cash Transactions:          
     Other real estate acquired in settlement of foreclosed loans  $1,624   $1,063 
     Loans made to finance sale of foreclosed real estate  $812   $244 
Change in unrealized gains on securities available-for-sale  $89   $680 

 

The accompanying notes are an integral part of this statement.

 

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

 

New Peoples Bankshares, Inc. (“The Company”) is a financial holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (“Bank”) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly-owned subsidiaries; NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004 the Company established NPB Capital Trust I for the purpose of issuing trust preferred securities. On September 27, 2006, the Company established NPB Capital Trust 2 for the purpose of issuing additional trust preferred securities. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank. In June 2012 the name of NPB Financial Services, Inc. was changed to NPB Insurance Services, Inc. which operates solely as an insurance agency. On March 4, 2016 the Federal Reserve Bank of Richmond approved the Company’s election to become a financial holding company. In July 2016, the Bank and its wholly-owned subsidiary NPB Insurance Services, Inc. announced by press release its teaming up with The Hilb Group of Virginia dba CSE Insurance Services, a division of the Hilb Group, LLC (“CSE”), located in Abingdon, Virginia, to provide insurance services for its current and future customers. Effective July 1, 2016, NPB Insurance Services, Inc. sold its existing book of business to CSE. These customers are now serviced by CSE and the Bank refers future insurance needs of its bank customers to CSE.

 

NOTE 2 ACCOUNTING PRINCIPLES:

 

These consolidated financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at March 31, 2017 and December 31, 2016, and the results of operations for the three-month periods ended March 31, 2017 and 2016. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three month periods ended March 31, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year.

 

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

 

NOTE 3 EARNINGS PER SHARE:

 

Basic earnings per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued related to outstanding common stock warrants are determined by the Treasury method. For the three-months ended March 31, 2017 and 2016, potential common shares of 880,978 and 882,353, respectively, were anti-dilutive and were not included in the calculation. Basic and diluted net income per common share calculations follows:

 

 

(Amounts in Thousands, Except
Share and Per Share Data)
  For the three months
ended March 31,
   2017  2016
Net income  $115   $698 
Weighted average shares outstanding   23,354,890    23,354,082 
Dilutive shares for stock warrants   —      —   
Weighted average dilutive shares outstanding   23,354,890    23,354,082 
           
Basic income per share  $0.00   $0.03 
Diluted income per share  $0.00   $0.03 

 

NOTE 4 CAPITAL:

 

Capital Requirements and Ratios

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), Tier 1 capital (as defined) to average assets (as defined), and Common Equity Tier 1 capital (as defined) to risk-weighted assets (as defined). As of March 31, 2017, the Bank meets all capital adequacy requirements to which it is subject.

 

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of March 31, 2017 and December 31, 2016, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

 

 

   Actual  Minimum Capital Requirement  Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)  Amount  Ratio  Amount  Ratio  Amount  Ratio
March 31, 2017:
Total Capital to Risk Weighted Assets:                              
New Peoples Bank, Inc.   67,196    16.19%  $33,197    8.0%  $41,496    10.0%
Tier 1 Capital to Risk Weighted Assets:                              
New Peoples Bank, Inc.   61,999    14.94%   24,898    6.0%   33,197    8.0%
Tier 1 Capital to Average Assets:                              
New Peoples Bank, Inc.   61,999    9.73%   25,498    4.0%   31,873    5.0%
Common Equity Tier 1 Capital
to Risk Weighted Assets:
                              
New Peoples Bank, Inc.   61,999    14.94%   18,673    4.5%   26,973    6.5%
                               
 December 31, 2016:                              
Total Capital to Risk Weighted Assets:                              
New Peoples Bank, Inc.   67,549    16.64%  $32,476    8.0%  $40,595    10.0%
Tier 1 Capital to Risk Weighted Assets:                              
New Peoples Bank, Inc.   62,462    15.39%   24,357    6.0%   32,476    8.0%
Tier 1 Capital to Average Assets:                              
New Peoples Bank, Inc.   62,462    9.93%   25,149    4.0%   31,436    5.0%
Common Equity Tier 1 Capital
to Risk Weighted Assets:
                              
New Peoples Bank, Inc.   62,462    15.39%   18,268    4.5%   26,386    6.5%

 

As of March 31, 2017, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and Common Equity Tier 1 ratios as set forth in the above tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.

 

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


 

NOTE 5 INVESTMENT SECURITIES:

 

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

 

  Gross   Gross   Approximate
  Amortized   Unrealized   Unrealized   Fair
(Dollars are in thousands) Cost   Gains   Losses   Value
March 31, 2017
U.S. Government Agencies $ 24,611 $ 77 $ 218 $ 24,470
Taxable municipals 2,332 3 48 2,287
Corporate bonds 3,600 189 - 3,789
Mortgage backed securities 42,069 26 631 41,464
Total Securities AFS $ 72,612 $ 295 $ 897 $ 72,010
 
December 31, 2016
U.S. Government Agencies $ 24,821 $ 80 $ 269 $ 24,632
Taxable municipals 2,340 2 50 2,292
Corporate bonds 3,600 149 - 3,749
Mortgage backed securities 39,941 25 628 39,338
Total Securities AFS $ 70,702 $ 256 $ 947 $ 70,011

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016.

                   
   Less than 12 Months  12 Months or More  Total
(Dollars are in thousands)  Fair Value  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
March 31, 2017                  
U.S. Government Agencies  $12,661   $204   $2,461   $14   $15,122   $218 
Taxable municipals   1,559    48    —      —      1,559    48 
Corporate bonds   —      —      —      —      —      —   
Mtg. backed securities   29,695    541    5,195    90    34,890    631 
Total Securities AFS  $43,915   $793   $7,656   $104   $51,571   $897 
                               
December 31, 2016                              
U.S. Government Agencies  $12,081   $250   $2,449   $19   $14,530   $269 
Taxable municipals   1,561    50    —      —      1,561    50 
Corporate bonds   500    —      —      —      500    —   
Mtg. backed securities   28,680    543    4,655    85    33,335    628 
Total Securities AFS  $42,822   $843   $7,104   $104   $49,926   $947 
                               

 

At March 31, 2017, the available-for-sale portfolio included 112 investments for which the fair market value was less than amortized cost. At December 31, 2016, the available-for-sale portfolio included 107 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had an other-than-temporary impairment.

 

There were no sales of investment securities during the three months ended March 31, 2017. Gross proceeds on the sale of investment securities were $12.9 million for the three months ended March 31, 2016, with $119 thousand of gross gains realized and $14 thousand of gross losses realized.

 

The amortized cost and fair value of investment securities at March 31, 2017, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

             
  Weighted
(Dollars are in thousands) Amortized   Fair   Average
Securities Available-for-Sale Cost   Value   Yield
Due in one year or less $ - $ -   -%
Due after one year through five years 2,184 2,177 2.04%
Due after five years through ten years   14,026   14,149   2.64%
Due after ten years   56,402   55,684   2.04%
Total $ 72,612 $ 72,010   2.16%

 

Investment securities with a carrying value of $9.4 million and $11.3 million at March 31, 2017 and December 31, 2016, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

 

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.6 million and $2.8 million as of March 31, 2017 and December 31, 2016, respectively.

 

NOTE 6 LOANS:

 

Loans receivable outstanding are summarized as follows:

 

       
(Dollars are in thousands)  March 31, 2017  December 31, 2016
Real estate secured:          
Commercial  $103,457   $103,331 
Construction and land development   26,588    25,755 
Residential 1-4 family   252,917    249,700 
Multifamily   14,135    12,582 
Farmland   24,912    24,948 
Total real estate loans   422,009    416,316 
Commercial   28,259    26,955 
Agriculture   3,662    3,164 
Consumer installment loans   21,839    22,188 
All other loans   721    6 
Total loans  $476,490   $468,629 

 

 

Loans receivable on nonaccrual status are summarized as follows:

 

       
(Dollars are in thousands)  March 31, 2017  December 31, 2016
Real estate secured:          
Commercial  $2,102   $3,403 
Construction and land development   328    319 
Residential 1-4 family   7,706    8,355 
Multifamily   162    166 
Farmland   3,541    1,003 
Total real estate loans   13,839    13,246 
Commercial   11    —   
Agriculture   83    83 
Consumer installment loans   49    76 
All other loans   —      —   
Total loans receivable on nonaccrual status  $13,982   $13,405 

 

Total interest income not recognized on nonaccrual loans for the three months ended March 31, 2017 and 2016 was $363 thousand and $94 thousand, respectively.

 

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

 

 

 

As of March 31, 2017

(Dollars are in thousands)

  Recorded
Investment
  Unpaid Principal Balance  Related
Allowance
With no related allowance recorded:               
Real estate secured:               
Commercial  $2,755   $3,128   $—   
Construction and land development   4    4    —   
Residential 1-4 family   3,781    4,084    —   
Multifamily   731    772    —   
Farmland   3,872    4,592    —   
Commercial   —      —      —   
Agriculture   19    19    —   
Consumer installment loans   9    9    —   
All other loans   —      —      —   
With an allowance recorded:               
Real estate secured:               
Commercial   611    697    125 
Construction and land development   229    463    95 
Residential 1-4 family   846    872    103 
Multifamily   —      —      —   
Farmland   589    602    297 
Commercial   66    66    17 
Agriculture   1    1    1 
Consumer installment loans   —      —      —   
All other loans   —      —      —   
Total  $13,513   $15,309   $638 

 

 

 

 

As of December 31, 2016

(Dollars are in thousands)

   

 

 

Recorded

Investment

    

 

Unpaid Principal Balance

    

 

 

Related

Allowance

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

 

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

 

 

   Three Months Ended
   March 31, 2017  March 31, 2016

 

 

(Dollars are in thousands)

  Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
With no related allowance recorded:                    
Real estate secured:                    
Commercial  $3,196   $25   $4,479   $35 
Construction and land development   5    —      171    (1)
Residential 1-4 family   3,821    49    3,599    51 
Multifamily   516    12    269    2 
Farmland   3,884    (115)   4,149    51 
Commercial   —      —      —      —   
Agriculture   19    —      36    1 
Consumer installment loans   18    —      27    1 
All other loans   —      —      —      —   
With an allowance recorded:                    
Real estate secured:                    
Commercial   901    2    1,768    —   
Construction and land development   235    —      283    —   
Residential 1-4 family   701    9    1,271    5 
Multifamily   —      —      117    2 
Farmland   590    5    640    6 
Commercial   67    —      74    1 
Agriculture   3    —      117    (2)
Consumer installment loans   5    —      28    —   
All other loans   —      —      —      —   
Total  $13,961   $(13)  $17,028   $152 

 

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

                   

 

 

 

 

 

As of March 31, 2017

(Dollars are in thousands)

  Loans
30-59
Days
Past
Due
  Loans
60-89
Days
Past
Due
  Loans
90 or
More
Days
Past
Due
  Total
Past
Due
Loans
  Current
Loans
  Total
Loans
Real estate secured:                              
Commercial  $1,239   $200   $18   $1,457   $102,000   $103,457 
Construction and land
development
   —      16    66    82    26,506    26,588 
Residential 1-4 family   3,509    1,319    1,372    6,200    246,717    252,917 
Multifamily   —      436    —      436    13,699    14,135 
Farmland   245    475    2,562    3,282    21,630    24,912 
Total real estate loans   4,993    2,446    4,018    11,457    410,552    422,009 
Commercial   76    —      11    87    28,172    28,259 
Agriculture   27    —      79    106    3,556    3,662 
Consumer installment
Loans
   42    3    24    69    21,770    21,839 
All other loans   —      —      —      —      721    721 
Total loans  $5,138   $2,449   $4,132   $11,719   $464,771   $476,490 

 

 

 

 

 

 

 

As of December 31, 2016

(Dollars are in thousands)

  Loans
30-59
Days
Past
Due
  Loans
60-89
Days
Past
Due
  Loans
90 or
More
Days
Past
Due
  Total
Past
Due
Loans
  Current
Loans
  Total
Loans
Real estate secured:                              
Commercial  $1,676   $307   $1,083   $3,066   $100,265   $103,331 
Construction and land
development
   103    17    44    164    25,591    25,755 
Residential 1-4 family   4,237    1,547    2,233    8,017    241,683    249,700 
Multifamily   1,367    —      —      1,367    11,215    12,582 
Farmland   2,987    —      —      2,987    21,961    24,948 
Total real estate loans   10,370    1,871    3,360    15,601    400,715    416,316 
Commercial   20    —      —      20    26,935    26,955 
Agriculture   19    —      78    97    3,067    3,164 
Consumer installment
Loans
   110    15    36    161    22,027    22,188 
All other loans   —      —      —      —      6    6 
Total loans  $10,519   $1,886   $3,474   $15,879   $452,750   $468,629 

 

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

 

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

 

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

 

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

 

Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

 

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

             

 

As of March 31, 2017

(Dollars are in thousands)

  Pass  Special
Mention
  Substandard  Total
Real estate secured:                    
   Commercial  $92,675   $8,465   $2,317   $103,457 
   Construction and land development   24,826    1,434    328    26,588 
   Residential 1-4 family   242,254    2,083    8,580    252,917 
   Multifamily   11,989    1,350    796    14,135 
   Farmland   18,993    1,613    4,306    24,912 
Total real estate loans   390,737    14,945    16,327    422,009 
Commercial   27,485    708    66    28,259 
Agriculture   3,564    14    84    3,662 
Consumer installment loans   21,762    —      77    21,839 
All other loans   721    —      —      721 
Total  $444,269   $15,667   $16,554   $476,490 

 

As of December 31, 2016

(Dollars are in thousands)

   

 

 

Pass

    

 

Special

Mention

    

 

 

Substandard

    

 

 

Total

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

 

 

 

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

 

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

 

As of March 31, 2017

(Dollars are in thousands)

  Beginning
Balance
  Charge
Offs
  Recoveries  Provisions  Ending Balance
Real estate secured:                         
Commercial  $1,625   $(73)  $—     $9   $1,561 
Construction and land development   346    —      —      (33)   313 
Residential 1-4 family   2,376    (162)   23    2    2,239 
Multifamily   241    —      —      33    274 
Farmland   428    —      5    60    493 
Total real estate loans   5,016    (235)   28    71    4,880 
Commercial   163    —      119    (69)   213 
Agriculture   31    —      1    (5)   27 
Consumer installment loans   123    (30)   13    7    113 
All other loans   —      —      —      5    5 
Unallocated   739    —      —      (9)   730 
Total  $6,072   $(265)  $161   $—     $5,968 

 

 

    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of March 31, 2017

(Dollars are in thousands)

 

Individually

Evaluated

for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

 

Individually

Evaluated for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

Real estate secured:                        
Commercial $ 125 $ 1,436 $ 1,561 $ 3,366 $ 100,091 $ 103,457

Construction and land

development

  95   218   313   233   26,355   26,588
Residential 1-4 family   103   2,136   2,239   4,627   248,290   252,917
Multifamily   -   274   274   731   13,404   14,135
Farmland   297   196   493   4,461   20,451   24,912
Total real estate loans   620   4,260   4,880   13,418   408,591   422,009
Commercial   17   196   213   66   28,193   28,259
Agriculture   1   26   27   20   3,642   3,662
Consumer installment loans   -   113   113   9   21,830   21,839
All other loans   -   5   5   -   721   721
Unallocated   -   730   730   -   -   -
Total $ 638 $ 5,330 $ 5,968 $ 13,513 $ 462,977 $ 476,490

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of December 31, 2016

(Dollars are in thousands)

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

 

 

                         
    Allowance for Loan Losses   Recorded Investment in Loans

 

 

As of December 31, 2016

(Dollars are in thousands)

 

Individually

Evaluated

for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

 

Individually

Evaluated for Impairment

  Collectively Evaluated for Impairment  

 

 

 

Total

Real estate secured:                        
Commercial $ 65 $ 1,560 $ 1,625 $ 4,827 $ 98,504 $ 103,331

Construction and land

development

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

 

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

 

NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

 

At March 31, 2017 there were $9.3 million in loans that are classified as troubled debt restructurings compared to $9.6 million at December 31, 2016. The following table presents information related to loans modified as troubled debt restructurings during the three months ended March 31, 2017 and 2016.

                       

 

 

For the three months ended

March 31, 2017

 

For the three months ended

March 31, 2016

 

Troubled Debt Restructurings

(Dollars are in thousands)

 

# of Loans

  Pre-Mod. Recorded Investment  

Post-Mod.

Recorded

Investment

 

 

# of

Loans

 

Pre-Mod.

Recorded Investment

 

Post-Mod.

Recorded

Investment

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

Construction and land

Development

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

 

During the three months ended March 31, 2017, the Company modified no loans for which the modification was considered to be a troubled debt restructuring. During the three months ended March 31, 2016, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate and maturity date were not modified; however, the payment terms were changed.

 

No loans modified as troubled debt restructurings defaulted during the three months ended March 31, 2017. There was one commercial real estate loan with a recorded investment of $310 thousand that had been modified as a troubled debt restructuring that defaulted during the three months ended March 31, 2016, which was within twelve months of the loan’s modification date. Generally, a troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

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

 

NOTE 9 OTHER REAL ESTATE OWNED:

 

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

 

(Dollars are in thousands)  March 31, 2017  December 31, 2016
Balance, beginning of period  $10,655   $12,398 
Additions   1,624    4,577 
Purchases of/improvements to
other real estate owned
   —      48 
Transfers of other real estate owned
to premises and equipment
   —      (125)
Proceeds from sales   (1,966)   (5,050)
Adjustment of carrying value   (176)   (1,414)
Gain from sales   24    221 
Balance, end of period  $10,161   $10,655 


NOTE 10 FAIR VALUES:

 

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

 

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

 

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

 

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

 

 

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

 

Investment Securities Available-for-Sale – Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available-for-sale securities, totaling $72.0 million and $70.0 million at March 31, 2017 and December 31, 2016, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

 

Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired a specific reserve may be established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines whether or not the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or whether or not an appraised value does not include estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. The aggregate carrying amounts of impaired loans carried at fair value were $12.9 million and $13.8 million at March 31, 2017 and December 31, 2016, respectively.

 

Foreclosed Assets Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Foreclosed assets are carried at the lower of the carrying value or fair value.  Fair value is based upon independent observable market prices or appraised values of the collateral with a third party less an estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral if further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $10.2 million and $10.7 million at March 31, 2017 and December 31, 2016, respectively.

 

Assets and liabilities measured at fair value are as follows as of March 31, 2017 (for purpose of this table the impaired loans are shown net of the related allowance):

(Dollars are in thousands)  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
               
    U.S. Government Agencies  $—     $24,470   $—   
    Taxable municipals   —      2,287    —   
    Corporate bonds   —      3,789    —   
    Mortgage backed securities   —      41,464    —   
(On a non-recurring basis)
Other real estate owned
   —      —      10,161 
Impaired loans:               
  Real estate secured:               
      Commercial   —      —      3,241 
      Construction and land development   —      —      138 
      Residential 1-4 family   —      —      4,524 
      Multifamily   —      —      731 
      Farmland   —      —      4,164 
  Commercial   —      —      49 
  Agriculture   —      —      19 
  Consumer installment loans   —      —      9 
  All other loans   —      —      —   
Total  $—     $72,010   $23,036 

 

 

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

(Dollars are in thousands)  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
               
    U.S. Government Agencies  $—     $24,632   $—   
    Taxable municipals   —      2,292    —   
    Corporate bonds