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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
☐ 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, a 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.
| Large accelerated filer [ ] | Accelerated filer [ ] | |
| Non-accelerated filer [ ] | Smaller reporting company [X] | |
| Emerging growth company [ ] |
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 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] |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding at November 12, 2019 | |
| Common Stock, $2.00 par value | 23,922,086 |
NEW PEOPLES BANKSHARES, INC.
INDEX
| PART I | FINANCIAL INFORMATION | Page |
| Item 1. | Financial Statements | |
| Consolidated Statements of Income – Nine months | ||
| ended September 30, 2019 and 2018 (Unaudited) | 3 | |
| Consolidated Statements of Income – Three months | ||
| ended September 30, 2019 and 2018 (Unaudited) | 4 | |
| Consolidated Statements of Comprehensive Income (Loss) – Three and Nine months | ||
| ended September 30, 2019 and 2018 (Unaudited) | 5 | |
| Consolidated Balance Sheets – September 30, 2019 (Unaudited) and December 31, 2018 | 6 | |
| Consolidated Statements of Changes in Stockholders’ Equity – | ||
| Three and Nine months ended September 30, 2019 and 2018 (Unaudited) | 7 | |
| Consolidated Statements of Cash Flows – Nine months | ||
| ended September 30, 2019 and 2018 (Unaudited) | 8 | |
| Notes to Consolidated Financial Statements | 9 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 35 |
| Item 4. | Controls and Procedures | 36 |
| PART II OTHER INFORMATION | 36 | |
| Item 1. | Legal Proceedings | 36 |
| Item 1A. Risk Factors | 36 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36 |
| Item 3. | Defaults upon Senior Securities | 36 |
| Item 4. | Mine Safety Disclosures | 36 |
| Item 5. | Other Information | 36 |
| Item 6. | Exhibits | 36 |
| SIGNATURES | 37 | |
Part I Financial Information
| Item 1 | Financial Statements |
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
| INTEREST AND DIVIDEND INCOME | 2019 | 2018 | ||||||
| Loans including fees | $ | 21,361 | $ | 19,578 | ||||
| Federal funds sold | 5 | 2 | ||||||
| Interest-earning deposits with banks | 643 | 281 | ||||||
| Investments | 1,066 | 1,178 | ||||||
| Dividends on equity securities (restricted) | 118 | 111 | ||||||
| Total Interest and Dividend Income | 23,193 | 21,150 | ||||||
| INTEREST EXPENSE | ||||||||
| Deposits | 3,795 | 2,366 | ||||||
| Borrowed funds | 675 | 700 | ||||||
| Total Interest Expense | 4,470 | 3,066 | ||||||
| NET INTEREST INCOME | 18,723 | 18,084 | ||||||
| PROVISION FOR LOAN LOSSES | 1,290 | 189 | ||||||
| NET INTEREST INCOME AFTER | ||||||||
| PROVISION FOR LOAN LOSSES | 17,433 | 17,895 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | 2,660 | 2,728 | ||||||
| Card processing and interchange | 2,276 | 2,109 | ||||||
| Insurance and investment fees | 481 | 382 | ||||||
| Other noninterest income | 1,184 | 319 | ||||||
| Total Noninterest Income | 6,601 | 5,538 | ||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | 11,020 | 10,928 | ||||||
| Occupancy and equipment expense | 3,407 | 3,840 | ||||||
| Data processing and telecommunications | 1,913 | 2,057 | ||||||
| Other operating expenses | 5,650 | 6,288 | ||||||
| Total Noninterest Expenses | 21,990 | 23,113 | ||||||
| INCOME BEFORE INCOME TAXES | 2,044 | 320 | ||||||
| INCOME TAX EXPENSE | 417 | 81 | ||||||
| NET INCOME | $ | 1,627 | $ | 239 | ||||
| Income Per Share | ||||||||
| Basic | $ | 0.07 | $ | 0.01 | ||||
| Fully Diluted | $ | 0.07 | $ | 0.01 | ||||
| Average Weighted Shares of Common Stock | ||||||||
| Basic | 23,922,086 | 23,922,086 | ||||||
| Diluted | 23,922,086 | 23,922,086 | ||||||
3
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
| INTEREST AND DIVIDEND INCOME | 2019 | 2018 | ||||||
| Loans including fees | $ | 7,290 | $ | 6,658 | ||||
| Federal funds sold | 1 | 1 | ||||||
| Interest-earning deposits with banks | 170 | 121 | ||||||
| Investments | 334 | 373 | ||||||
| Dividends on equity securities (restricted) | 38 | 38 | ||||||
| Total Interest and Dividend Income | 7,833 | 7,191 | ||||||
| INTEREST EXPENSE | ||||||||
| Deposits | 1,275 | 901 | ||||||
| Borrowed funds | 211 | 263 | ||||||
| Total Interest Expense | 1,486 | 1,164 | ||||||
| NET INTEREST INCOME | 6,347 | 6,027 | ||||||
| PROVISION FOR LOAN LOSSES | 1,020 | 63 | ||||||
| NET INTEREST INCOME AFTER | ||||||||
| PROVISION FOR LOAN LOSSES | 5,327 | 5,964 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges and fees | 947 | 942 | ||||||
| Card processing and interchange | 800 | 720 | ||||||
| Insurance and investment fees | 158 | 129 | ||||||
| Other noninterest income | 950 | 126 | ||||||
| Total Noninterest Income | 2,855 | 1,917 | ||||||
| NONINTEREST EXPENSES | ||||||||
| Salaries and employee benefits | 3,544 | 3,614 | ||||||
| Occupancy and equipment expense | 1,128 | 1,249 | ||||||
| Data processing and telecommunications | 615 | 717 | ||||||
| Other operating expenses | 1,792 | 1,999 | ||||||
| Total Noninterest Expenses | 7,079 | 7,579 | ||||||
| INCOME BEFORE INCOME TAXES | 1,103 | 302 | ||||||
| INCOME TAX EXPENSE | 227 | 94 | ||||||
| NET INCOME | $ | 876 | $ | 208 | ||||
| Income Per Share | ||||||||
| Basic | $ | 0.04 | $ | 0.01 | ||||
| Fully Diluted | $ | 0.04 | $ | 0.01 | ||||
| Weighted Average Shares of Common Stock | ||||||||
| Basic | 23,922,086 | 23,922,086 | ||||||
| Diluted | 23,922,086 | 23,922,086 | ||||||
4
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(IN THOUSANDS)
(UNAUDITED)
|
For the three months ended
September 30, |
For the nine months ended
September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| NET INCOME | $ | 876 | $ | 208 | $ | 1,627 | $ | 239 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Investment Securities Activity | ||||||||||||||||
| Unrealized gains (losses) arising during the period | 191 | (407 | ) | 1,682 | (1,655 | ) | ||||||||||
| Related deferred tax (expense) benefit | (40 | ) | 86 | (353 | ) | 349 | ||||||||||
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | 151 | (321 | ) | 1,329 | (1,306 | ) | ||||||||||
| TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 1,027 | $ | (113 | ) | $ | 2,956 | $ | (1,067 | ) | ||||||
5
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
| ASSETS | September 30, | December 31, | ||||||
| 2019 | 2018 | |||||||
| Cash and due from banks | $ | 16,106 | $ | 12,245 | ||||
| Interest-bearing deposits with banks | 32,339 | 15,664 | ||||||
| Federal funds sold | 240 | 264 | ||||||
| Total Cash and Cash Equivalents | 48,685 | 28,173 | ||||||
| Investment securities available-for-sale | 53,478 | 59,407 | ||||||
| Loans held for sale | 571 | — | ||||||
| Loans receivable | 558,174 | 547,096 | ||||||
| Allowance for loan losses | (5,150 | ) | (5,336 | ) | ||||
| Net loans | 553,024 | 541,760 | ||||||
| Bank premises and equipment, net | 23,363 | 24,195 | ||||||
| Other real estate owned | 4,339 | 5,937 | ||||||
| Accrued interest receivable | 2,177 | 1,934 | ||||||
| Deferred taxes, net | 4,705 | 5,476 | ||||||
| Right-of-use assets – operating leases | 5,933 | 4,942 | ||||||
| Other assets | 10,664 | 10,318 | ||||||
| Total Assets | $ | 706,939 | $ | 682,142 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Noninterest bearing | $ | 175,971 | $ | 164,298 | ||||
| Interest-bearing | 445,632 | 431,694 | ||||||
| Total Deposits | 621,603 | 595,992 | ||||||
| Borrowed funds | 21,496 | 27,126 | ||||||
| Lease liabilities – operating leases | 5,933 | 4,942 | ||||||
| Accrued interest payable | 687 | 587 | ||||||
| Accrued expenses and other liabilities | 3,014 | 2,245 | ||||||
| Total Liabilities | 652,733 | 630,892 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock - $2.00 par value; 50,000,000 shares authorized; | ||||||||
|
23,922,086 shares issued and outstanding at
September 30, 2019 and December 31, 2018 |
47,844 | 47,844 | ||||||
| Additional paid-in-capital | 14,570 | 14,570 | ||||||
| Retained deficit | (8,301 | ) | (9,928 | ) | ||||
| Accumulated other comprehensive loss | 93 | (1,236 | ) | |||||
| Total Stockholders’ Equity | 54,206 | 51,250 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 706,939 | $ | 682,142 | ||||
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
| Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Deficit |
Accumulated Other
Comprehensive Income (Loss) |
Total Stockholders’ Equity | |||||||||||||||||||
| Balance, December 31, 2017 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (10,847 | ) | $ | (594 | ) | $ | 50,973 | |||||||||||
| Net income | — | — | — | 80 | — | 80 | ||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (821 | ) | (821 | ) | ||||||||||||||||
| Balance, March 31, 2018 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (10,767 | ) | $ | (1,415 | ) | $ | 50,232 | |||||||||||
| Net loss | — | — | — | (49 | ) | — | (49 | ) | ||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (164 | ) | (164 | ) | ||||||||||||||||
| Balance, June 30, 2018 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (10,816 | ) | $ | (1,579 | ) | $ | 50,019 | |||||||||||
| Net income | — | — | — | 208 | — | 208 | ||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (321 | ) | (321 | ) | ||||||||||||||||
| Balance, September 30, 2018 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (10,608 | ) | $ | (1,900 | ) | $ | 49,906 | |||||||||||
| Balance, December 31, 2018 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (9,928 | ) | $ | (1,236 | ) | $ | 51,250 | |||||||||||
| Net income | — | — | — | 406 | — | 406 | ||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 370 | 370 | ||||||||||||||||||
| Balance, March 31, 2019 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (9,522 | ) | $ | (866 | ) | $ | 52,026 | |||||||||||
| Net income | — | — | — | 345 | — | 345 | ||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 808 | 808 | ||||||||||||||||||
| Balance, June 30, 2019 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (9,177 | ) | $ | (58 | ) | $ | 53,179 | |||||||||||
| Net income | — | — | — | 876 | — | 876 | ||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 151 | 151 | ||||||||||||||||||
| Balance, September 30, 2019 | 23,922 | $ | 47,844 | $ | 14,570 | $ | (8,301 | ) | $ | 93 | $ | 54,206 | ||||||||||||
7
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(IN THOUSANDS)
(UNAUDITED)
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 1,627 | $ | 239 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Amortization of bond premiums/discounts | 410 | 500 | ||||||
| Provision for loan losses | 1,290 | 189 | ||||||
| Depreciation | 1,757 | 1,935 | ||||||
| Income on life insurance | (54 | ) | (42 | ) | ||||
| Gain on sale of mortgage loans | (78 | ) | — | |||||
| Gain on sale and leaseback transaction | (803 | ) | — | |||||
| (Gain) Loss on sale of premises and equipment | (4 | ) | 76 | |||||
| Loss on sale of foreclosed assets | 55 | 96 | ||||||
| Loans originated for sale | (4,216 | ) | — | |||||
| Proceeds from loans held for sale | 8,082 | — | ||||||
| Adjustment of carrying value of foreclosed real estate | 214 | 421 | ||||||
| Deferred tax cost (benefit) | 418 | 83 | ||||||
| Net change in: | ||||||||
| Interest receivable | (243 | ) | (27 | ) | ||||
| Other assets | (278 | ) | 101 | |||||
| Accrued interest payable | 100 | 121 | ||||||
| Accrued expenses and other liabilities | 769 | (1,114 | ) | |||||
| Net Cash Provided by Operating Activities | 9,046 | 2,578 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net increase in loans receivable | (16,006 | ) | (21,235 | ) | ||||
| Purchase of securities available-for-sale | (790 | ) | — | |||||
| Proceeds from sales, maturities, and principal paydowns of securities available-for-sale | 7,991 | 8,542 | ||||||
| Net (purchase) sale of equity securities (restricted) | (14 | ) | 21 | |||||
| Proceeds from sale of premises and equipment | 559 | 806 | ||||||
| Payments for the purchase of premises and equipment | (1,429 | ) | (1,509 | ) | ||||
| Proceeds from insurance claims on other real estate owned | 19 | — | ||||||
| Proceeds from sales of other real estate owned | 1,155 | 1,046 | ||||||
| Net Cash Used In Investing Activities | (8,515 | ) | (12,329 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net change in borrowed funds | (5,630 | ) | (558 | ) | ||||
| Net change in non-interest bearing deposits | 11,673 | 16,338 | ||||||
| Net change in interest bearing deposits | 13,938 | (670 | ) | |||||
| Net Cash Provided by Financing Activities | 19,981 | 15,110 | ||||||
| Net increase in cash and cash equivalents | 20,512 | 5,359 | ||||||
| Cash and Cash Equivalents, Beginning of Period | 28,173 | 32,705 | ||||||
| Cash and Cash Equivalents, End of Period | $ | 48,685 | $ | 38,064 | ||||
| Supplemental Disclosure of Cash Paid During the Period for: | ||||||||
| Interest | $ | 4,370 | $ | 2,945 | ||||
| Taxes | $ | — | $ | 320 | ||||
| Supplemental Disclosure of Non Cash Transactions: | ||||||||
| Transfer of loans to loans held for sale | $ | 4,359 | $ | — | ||||
| Right-of-use asset established in exchange for new operating lease liability | $ | 1,232 | $ | — | ||||
| Loan to finance sale of premises | $ | 752 | $ | — | ||||
| Other real estate acquired in settlement of foreclosed loans | $ | 492 | $ | 1,636 | ||||
| Loans made to finance sale of foreclosed real estate | $ | 647 | $ | 467 | ||||
| Change in unrealized gains (losses) on securities available-for-sale | $ | 1,682 | $ | (1,655 | ) | |||
8
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. (the “Bank”). The Bank was organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. Services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2 ACCOUNTING PRINCIPLES:
These consolidated financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at September 30, 2019 and December 31, 2018, and the results of operations for the three and nine-month periods ended September 30, 2019 and 2018. 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, 2018. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
NOTE 3 EARNINGS PER SHARE:
Basic earnings per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued related to outstanding common stock warrants are determined by the Treasury method. There were no dilutive potential common shares for the three and nine months ended September 30, 2019. Basic and diluted net income per common share calculations follow:
|
(Amounts in Thousands, Except
Share and Per Share Data) |
For the three months
ended September 30, |
For the nine months
ended September 30, |
||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net income | $ | 876 | $ | 208 | $ | 1,627 | $ | 239 | ||||||||
| Weighted average shares outstanding | 23,922,086 | 23,922,086 | 23,922,086 | 23,922,086 | ||||||||||||
| Dilutive shares | — | — | — | — | ||||||||||||
| Weighted average dilutive shares outstanding | 23,922,086 | 23,922,086 | 23,922,086 | 23,922,086 | ||||||||||||
| Basic income per share | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | 0.01 | ||||||||
| Diluted income per share | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | 0.01 | ||||||||
9
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 ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%. Tier 1 capital consists of common stockholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of September 30, 2019 and December 31, 2018, 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 | ||||||||||||||||||
| September 30, 2019: | ||||||||||||||||||||||||
| Total Capital to Risk Weighted Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 71,435 | 14.65 | % | $ | 39,005 | 8.0 | % | $ | 48,765 | 10.0 | % | |||||||||||||
| Tier 1 Capital to Risk Weighted Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 66,285 | 13.60 | % | 29,254 | 6.0 | % | 39,005 | 8.0 | % | |||||||||||||||
| Tier 1 Capital to Average Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 66,285 | 9.50 | % | 27,920 | 4.0 | % | 34,900 | 5.0 | % | |||||||||||||||
|
Common Equity Tier 1 Capital
to Risk Weighted Assets: |
||||||||||||||||||||||||
| New Peoples Bank, Inc. | 66,285 | 13.60 | % | 21,940 | 4.5 | % | 31,691 | 6.5 | % | |||||||||||||||
| December 31, 2018: | ||||||||||||||||||||||||
| Total Capital to Risk Weighted Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 70,002 | 14.39 | % | $ | 38,912 | 8.0 | % | $ | 48,640 | 10.0 | % | |||||||||||||
| Tier 1 Capital to Risk Weighted Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 64,666 | 13.29 | % | 29,184 | 6.0 | % | 38,912 | 8.0 | % | |||||||||||||||
| Tier 1 Capital to Average Assets: | ||||||||||||||||||||||||
| New Peoples Bank, Inc. | 64,666 | 9.59 | % | 26,960 | 4.0 | % | 33,700 | 5.0 | % | |||||||||||||||
|
Common Equity Tier 1 Capital
to Risk Weighted Assets: |
||||||||||||||||||||||||
| New Peoples Bank, Inc. | 64,666 | 13.29 | % | 21,888 | 4.5 | % | 31,616 | 6.5 | % | |||||||||||||||
As of September 30, 2019, 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 were no subsequent conditions or events 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 was gradually increased through January 1, 2019 to 2.50%. Banks are now 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.
The Bank’s capital conservation buffer is 6.65% as of September 30, 2019.
10
NOTE 5 INVESTMENT SECURITIES:
The amortized cost and estimated fair value of securities (all available-for-sale (“AFS”)) are as follows:
| Gross | Gross | Approximate | ||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (Dollars are in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| September 30, 2019 | ||||||||||||||||
| U.S. Government Agencies | $ | 16,573 | $ | 104 | $ | (96 | ) | $ | 16,581 | |||||||
| Taxable municipals | 4,399 | 92 | — | 4,491 | ||||||||||||
| Corporate bonds | 5,411 | 120 | — | 5,531 | ||||||||||||
| Mortgage backed securities | 26,977 | 90 | (192 | ) | 26,875 | |||||||||||
| Total Securities AFS | $ | 53,360 | $ | 406 | $ | (288 | ) | $ | 53,478 | |||||||
| December 31, 2018 | ||||||||||||||||
| U.S. Government Agencies | $ | 19,755 | $ | 26 | $ | (392 | ) | $ | 19,389 | |||||||
| Taxable municipals | 4,428 | — | (115 | ) | 4,313 | |||||||||||
| Corporate bonds | 5,422 | 47 | (149 | ) | 5,320 | |||||||||||
| Mortgage backed securities | 31,366 | 11 | (992 | ) | 30,385 | |||||||||||
| Total Securities AFS | $ | 60,971 | $ | 84 | $ | (1,648 | ) | $ | 59,407 | |||||||
The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2019 and December 31, 2018.
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| (Dollars are in thousands) | Fair Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| U.S. Government Agencies | $ | 3,734 | $ | (17 | ) | $ | 4,968 | $ | (79 | ) | $ | 8,702 | $ | (96 | ) | |||||||||
| Taxable municipals | — | — | — | — | — | — | ||||||||||||||||||
| Corporate bonds | — | — | — | — | — | — | ||||||||||||||||||
| Mtg. backed securities | 1,871 | (4 | ) | 16,518 | (188 | ) | 18,389 | (192 | ) | |||||||||||||||
| Total Securities AFS | $ | 5,605 | $ | (21 | ) | $ | 21,486 | $ | (267 | ) | $ | 27,091 | $ | (288 | ) | |||||||||
| December 31, 2018 | ||||||||||||||||||||||||
| U.S. Government Agencies | $ | 5,013 | $ | (68 | ) | $ | 11,585 | $ | (324 | ) | $ | 16,599 | $ | (392 | ) | |||||||||
| Taxable municipals | — | — | 4,049 | (115 | ) | 4,049 | (115 | ) | ||||||||||||||||
| Corporate bonds | 1,713 | (43 | ) | 1,423 | (106 | ) | 3,136 | (149 | ) | |||||||||||||||
| Mtg. backed securities | 165 | (2 | ) | 29,245 | (990 | ) | 29,410 | (992 | ) | |||||||||||||||
| Total Securities AFS | $ | 6,891 | $ | (113 | ) | $ | 46,302 | $ | (1,535 | ) | $ | 53,194 | $ | (1,648 | ) | |||||||||
At September 30, 2019, there were 109 securities in a loss position, of which 90 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost.
Investment securities with a carrying value of $7.2 million and $8.0 million at September 30, 2019 and December 31, 2018, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.
There were no sales of investment securities during the nine months ended September 30, 2019 or September 30, 2018.
11
The amortized cost and fair value of investment securities at September 30, 2019, 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 | 4,594 | 4,630 | 2.55 | % | ||||||||
| Due after five years through ten years | 13,349 | 13,445 | 3.39 | % | ||||||||
| Due after ten years | 35,417 | 35,403 | 2.47 | % | ||||||||
| Total | $ | 53,360 | $ | 53,478 | 2.70 | % | ||||||
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 $2.5 million as of September 30, 2019 and December 31, 2018, respectively.
NOTE 6 LOANS:
Loans held for sale of $571 thousand represents mortgage loans originated through secondary mortgage program, which have been originated in the Bank’s name since the second quarter of 2019. Previously, these loans were originated in the name of and funded bythe purchaser and were not included in loans receivable.
Loans receivable outstanding are summarized as follows:
| (Dollars are in thousands) | September 30, 2019 | December 31, 2018 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 167,300 | $ | 140,862 | ||||
| Construction and land development | 29,615 | 35,119 | ||||||
| Residential 1-4 family | 244,273 | 249,946 | ||||||
| Multifamily | 13,057 | 13,496 | ||||||
| Farmland | 21,469 | 22,114 | ||||||
| Total real estate loans | 475,714 | 461,537 | ||||||
| Commercial | 51,662 | 55,157 | ||||||
| Agriculture | 4,839 | 5,266 | ||||||
| Consumer installment loans | 24,221 | 24,538 | ||||||
| All other loans | 1,738 | 598 | ||||||
| Total loans | $ | 558,174 | $ | 547,096 | ||||
Loans receivable on nonaccrual status are summarized as follows:
| (Dollars are in thousands) | September 30, 2019 | December 31, 2018 | ||||||
| Real estate secured: | ||||||||
| Commercial | $ | 1,069 | $ | 784 | ||||
| Construction and land development | 39 | 157 | ||||||
| Residential 1-4 family | 2,431 | 3,626 | ||||||
| Multifamily | — | 76 | ||||||
| Farmland | 539 | 1,637 | ||||||
| Total real estate loans | 4,078 | 6,300 | ||||||
| Commercial | 558 | 61 | ||||||
| Agriculture | — | 1 | ||||||
| Consumer installment loans | — | 7 | ||||||
| Total loans receivable on nonaccrual status | $ | 4,636 | $ | 6,369 | ||||
12
Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2019 and 2018 was $544 thousand and $358 thousand, respectively.
The following table presents information concerning the Company’s investment in loans considered impaired as of September 30, 2019 and December 31, 2018:
|
As of September 30, 2019
(Dollars are in thousands) |
Recorded
Investment |
Unpaid Principal Balance |
Related
Allowance |
|||||||||
| With no related allowance recorded : | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | 2,172 | $ | 2,229 | $ | — | ||||||
| Construction and land development | 79 | 353 | — | |||||||||
| Residential 1-4 family | 1,508 | 1,599 | — | |||||||||
| Multifamily | — | — | — | |||||||||
| Farmland | 756 | 939 | — | |||||||||
| Commercial | 90 | 142 | — | |||||||||
| Agriculture | — | — | — | |||||||||
| Consumer installment loans | 6 | 6 | — | |||||||||
| All other loans | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | 368 | 381 | 75 | |||||||||
| Construction and land development | — | — | — | |||||||||
| Residential 1-4 family | 56 | 61 | 46 | |||||||||
| Multifamily | — | — | — | |||||||||
| Farmland | — | — | — | |||||||||
| Commercial | 462 | 1,136 | 100 | |||||||||
| Agriculture | — | — | — | |||||||||
| Consumer installment loans | — | — | — | |||||||||
| All other loans | — | — | — | |||||||||
| Total | $ | 5,497 | $ | 6,846 | $ | 221 | ||||||
|
As of December 31, 2018
(Dollars are in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
|||||||||
| With no related allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | $ | 1,887 | $ | 1,941 | $ | — | ||||||
| Construction and land development | 114 | 379 | — | |||||||||
| Residential 1-4 family | 2,880 | 3,168 | — | |||||||||
| Multifamily | 75 | 117 | — | |||||||||
| Farmland | 1,693 | 1,880 | — | |||||||||
| Commercial | — | — | — | |||||||||
| Agriculture | — | — | — | |||||||||
| Consumer installment loans | — | — | — | |||||||||
| All other loans | — | — | — | |||||||||
| With an allowance recorded: | ||||||||||||
| Real estate secured: | ||||||||||||
| Commercial | 435 | 539 | 40 | |||||||||
| Construction and land development | — | — | — | |||||||||
| Residential 1-4 family | 431 | 454 | 132 | |||||||||
| Multifamily | — | — | — | |||||||||
| Farmland | 345 | 358 | 132 | |||||||||
| Commercial | 109 | 109 | 13 | |||||||||
| Agriculture | — | — | — | |||||||||
| Consumer installment loans | 7 | 7 | 1 | |||||||||
| All other loans | — | — | — | |||||||||
| Total | $ | 7,976 | $ | 8,952 | $ | 318 | ||||||
13
The following table presents information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated:
| Nine months Ended | ||||||||||||||||
| September 30, 2019 | September 30, 2018 | |||||||||||||||
| (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 | $ | 1,918 | $ | 76 | $ | 2,724 | $ | 95 | ||||||||
| Construction and land development | 96 | 3 | 220 | 1 | ||||||||||||
| Residential 1-4 family | 2,114 | 47 | 3,229 | 137 | ||||||||||||
| Multifamily | 37 | 1 | 163 | 5 | ||||||||||||
| Farmland | 1,235 | 29 | 1,515 | 51 | ||||||||||||
| Commercial | 691 | 11 | 166 | 1 | ||||||||||||
| Agriculture | — | — | 4 | — | ||||||||||||
| Consumer installment loans | 3 | — | 2 | — | ||||||||||||
| All other loans | — | — | — | — | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | 496 | 1 | 1,409 | 16 | ||||||||||||
| Construction and land development | — | — | — | — | ||||||||||||
| Residential 1-4 family | 364 | — | 391 | 13 | ||||||||||||
| Multifamily | — | — | — | — | ||||||||||||
| Farmland | 223 | 6 | 365 | — | ||||||||||||
| Commercial | 563 | — | 293 | 2 | ||||||||||||
| Agriculture | — | — | — | — | ||||||||||||
| Consumer installment loans | 3 | 6 | 1 | |||||||||||||
| All other loans | — | — | — | — | ||||||||||||
| Total | $ | 7,743 | $ | 174 | $ | 10,487 | $ | 322 | ||||||||
14
| Three Months Ended | ||||||||||||||||
| September 30, 2019 | September 30, 2018 | |||||||||||||||
| (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 | $ | 1,978 | $ | 34 | $ | 2,710 | $ | 41 | ||||||||
| Construction and land development | 84 | 3 | 145 | 1 | ||||||||||||
| Residential 1-4 family | 1,365 | 8 | 3,093 | 50 | ||||||||||||
| Multifamily | — | — | 80 | 1 | ||||||||||||
| Farmland | 788 | 16 | 1,816 | 9 | ||||||||||||
| Commercial | 45 | — | 10 | 1 | ||||||||||||
| Agriculture | — | — | 1 | — | ||||||||||||
| Consumer installment loans | 6 | — | — | — | ||||||||||||
| All other loans | — | — | — | — | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Real estate secured: | ||||||||||||||||
| Commercial | 372 | — | 544 | — | ||||||||||||
| Construction and land development | — | — | — | — | ||||||||||||
| Residential 1-4 family | 340 | — | 393 | 6 | ||||||||||||
| Multifamily | — | — | — | — | ||||||||||||
| Farmland | 111 | — | 357 | — | ||||||||||||
| Commercial | 1,036 | 1 | 110 | — | ||||||||||||
| Agriculture | — | — | — | — | ||||||||||||
| Consumer installment loans | — | — | 7 | — | ||||||||||||
| All other loans | — | — | — | — | ||||||||||||
| Total | $ | 6,125 | $ | 62 | $ | 9,266 | $ | 109 | ||||||||
An age analysis of past due loans receivable is below. At September 30, 2019 and December 31, 2018, there were no loans over 90 days past due that were accruing.
|
As of September 30, 2019
(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 | $ | — | $ | 758 | $ | 317 | $ | 1,075 | $ | 166,225 | $ | 167,300 | ||||||||||||
|
Construction and land
development |
57 | 14 | 2 | 73 | 29,542 | 29,615 | ||||||||||||||||||
| Residential 1-4 family | 2,616 | 1,112 | 733 | 4,461 | 239,812 | 244,273 | ||||||||||||||||||
| Multifamily | 121 | — | — | 121 | 12,936 | 13,057 | ||||||||||||||||||
| Farmland | — | — | 152 | 152 | 21,317 | 21,469 | ||||||||||||||||||
| Total real estate loans | 2,794 | 1,884 | 1,204 | 5,882 | 469,832 | 475,714 | ||||||||||||||||||
| Commercial | 35 | 110 | 516 | 661 | 51,001 | 51,662 | ||||||||||||||||||
| Agriculture | 40 | — | — | 40 | 4,799 | 4,839 | ||||||||||||||||||
|
Consumer installment
loans |
71 | 8 | — | 79 | 24,142 | 24,221 | ||||||||||||||||||
| All other loans | 38 | — | — | 38 | 1,700 | 1,738 | ||||||||||||||||||
| Total loans | $ | 2,978 | $ | 2,002 | $ | 1,720 | $ | 6,700 | $ | 551,474 | $ | 558,174 | ||||||||||||
15
|
As of December 31, 2018
(Dollars are in thousands) |
Loans
30-59 Days Past Due |
Loans
60-89 Days Past Due |
Loans
90 or More Days Past Due |
Total
Past Due Loans |
Current
Loans |
Total
Loans |
||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 80 | $ | 31 | $ | 137 | $ | 248 | $ | 140,614 | $ | 140,862 | ||||||||||||
|
Construction and land
development |
70 | — | 27 | 97 | 35,022 | 35,119 | ||||||||||||||||||
| Residential 1-4 family | 3,468 | 564 | 525 | 4,557 | 245,389 | 249,946 | ||||||||||||||||||
| Multifamily | — | 273 | — | 273 | 13,223 | 13,496 | ||||||||||||||||||
| Farmland | 316 | — | 1090 | 1406 | 20,708 | 22,114 | ||||||||||||||||||
| Total real estate loans | 3,934 | 868 | 1,779 | 6,581 | 454,956 | 461,537 | ||||||||||||||||||
| Commercial | 68 | — | 61 | 129 | 55,028 | 55,157 | ||||||||||||||||||
| Agriculture | 22 | — | — | 22 | 5,244 | 5,266 | ||||||||||||||||||
|
Consumer installment
loans |
74 | 15 | — | 89 | 24,449 | 24,538 | ||||||||||||||||||
| All other loans | — | — | — | — | 598 | 598 | ||||||||||||||||||
| Total loans | $ | 4,098 | $ | 883 | $ | 1,840 | $ | 6,821 | $ | 540,275 | $ | 547,096 | ||||||||||||
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 categories of loans receivable was as follows:
|
As of September 30, 2019
(Dollars are in thousands) |
Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 163,299 | $ | 2,932 | $ | 1,069 | $ | — | $ | 167,300 | ||||||||||
| Construction and land development | 29,196 | 369 | 50 | — | 29,615 | |||||||||||||||
| Residential 1-4 family | 240,610 | 1,172 | 2,491 | — | 244,273 | |||||||||||||||
| Multifamily | 13,057 | — | — | — | 13,057 | |||||||||||||||
| Farmland | 19,415 | 1,515 | 539 | — | 21,469 | |||||||||||||||
| Total real estate loans | 465,577 | 5,988 | 4,149 | — | 475,714 | |||||||||||||||
| Commercial | 48,607 | 2,483 | 81 | 491 | 51,662 | |||||||||||||||
| Agriculture | 4,783 | 12 | 44 | — | 4,839 | |||||||||||||||
| Consumer installment loans | 24,218 | 2 | 1 | — | 24,221 | |||||||||||||||
| All other loans | 1,738 | — | — | — | 1,738 | |||||||||||||||
| Total | $ | 544,923 | $ | 8,485 | $ | 4,275 | $ | 491 | $ | 558,174 | ||||||||||
16
|
As of December 31, 2018
(Dollars are in thousands) |
Pass |
Special
Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 137,146 | $ | 2,890 | $ | 826 | $ | — | $ | 140,862 | ||||||||||
| Construction and land development | 34,231 | 718 | 170 | — | 35,119 | |||||||||||||||
| Residential 1-4 family | 243,950 | 1,523 | 4,473 | — | 249,946 | |||||||||||||||
| Multifamily | 13,357 | 63 | 76 | — | 13,496 | |||||||||||||||
| Farmland | 18,126 | 2,331 | 1,657 | — | 22,114 | |||||||||||||||
| Total real estate loans | 446,810 | 7,525 | 7,202 | — | 461,537 | |||||||||||||||
| Commercial | 52,156 | 2,940 | 61 | — | 55,157 | |||||||||||||||
| Agriculture | 5,255 | 10 | 1 | — | 5,266 | |||||||||||||||
| Consumer installment loans | 24,493 | 35 | 10 | — | 24,538 | |||||||||||||||
| All other loans | 598 | — | — | — | 598 | |||||||||||||||
| Total | $ | 529,312 | $ | 10,510 | $ | 7,274 | $ | — | $ | 547,096 | ||||||||||
NOTE 7 ALLOWANCE FOR LOAN LOSSES:
The following table details activity in the allowance for loan losses by portfolio segment for the period ended September 30, 2019. The commercial charge-off amount includes $1 million in losses incurred during the third quarter of 2019, related to three unrelated borrowers, who either ceased business operations or filed bankruptcy. These losses resulted in a provision to the allowance during the third quarter of $1 million. During the second quarter of 2019, $4.4 million of non-performing or under-performing real estate loans were sold resulting in $113 thousand of charge-offs and $57 thousand of recoveries.
| As of September 30, 2019 | Beginning Balance | Charge Offs | Ending Balance | ||||||||
| (Dollars are in thousands) | Recoveries | Provisions | |||||||||
| Real estate secured: | |||||||||||
| Commercial | $ | 1,386 | $ | - | $ | 16 | $ | (143) | $ | 1,259 | |
| Construction and land development | 202 | - | 34 | (70) | 166 | ||||||
| Residential 1-4 family | 2,437 | (171) | 168 | (566) | 1,868 | ||||||
| Multifamily | 89 | - | 30 | (17) | 102 | ||||||
| Farmland | 287 | (33) | 8 | (135) | 127 | ||||||
| Total real estate loans | 4,401 | (204) | 256 | (931) | 3,522 | ||||||
| Commercial | 448 | (1,563) | 59 | 2,480 | 1,424 | ||||||
| Agriculture | 37 | (9) | 1 | (5) | 24 | ||||||
| Consumer installment loans | 172 | (73) | 57 | 13 | 169 | ||||||
| All other loans | 3 | - | - | 5 | 8 | ||||||
| Unallocated | 275 | - | - | (272) | 3 | ||||||
| Total | $ | 5,336 | $ | (1,849) | $ | 373 | $ | 1,290 | $ | 5,150 | |
17
| Allowance for Loan Losses | Recorded Investment in Loans | |||||||||||||||||||||||
|
As of September 30, 2019
(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 | $ | 75 | $ | 1,184 | $ | 1,259 | $ | 2,540 | $ | 164,760 | $ | 167,300 | ||||||||||||
|
Construction and land
development |
— | 166 | 166 | 79 | 29,536 | 29,615 | ||||||||||||||||||
| Residential 1-4 family | 46 | 1,822 | 1,868 | 1,564 | 242,709 | 244,273 | ||||||||||||||||||
| Multifamily | — | 102 | 102 | — | 13,057 | 13,057 | ||||||||||||||||||
| Farmland | — | 127 | 127 | 756 | 20,713 | 21,469 | ||||||||||||||||||
| Total real estate loans | 121 | 3,401 | 3,522 | 4,939 | 470,775 | 475,714 | ||||||||||||||||||
| Commercial | 100 | 1,324 | 1,424 | 552 | 51,110 | 51,662 | ||||||||||||||||||
| Agriculture | — | 24 | 24 | — | 4,839 | 4,839 | ||||||||||||||||||
| Consumer installment loans | — | 169 | 169 | 6 | 24,215 | 24,221 | ||||||||||||||||||
| All other loans | — | 8 | 8 | — | 1,738 | 1,738 | ||||||||||||||||||
| Unallocated | — | 3 | 3 | — | — | — | ||||||||||||||||||
| Total | $ | 221 | $ | 4,929 | $ | 5,150 | $ | 5,497 | $ | 552,677 | $ | 558,174 | ||||||||||||
The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
As of December 31, 2018
(Dollars are in thousands) |
Beginning
Balance |
Charge
Offs |
Recoveries | Provisions | Ending Balance | |||||||||||||||
| Real estate secured: | ||||||||||||||||||||
| Commercial | $ | 1,989 | $ | (334 | ) | $ | 73 | $ | (342 | ) | $ | 1,386 | ||||||||
| Construction and land development | 191 | (96 | ) | 11 | 96 | 202 | ||||||||||||||
| Residential 1-4 family | 2,400 | (290 | ) | 73 | 254 | 2,437 | ||||||||||||||
| Multifamily | 106 | — | — | (17 | ) | 89 | ||||||||||||||
| Farmland | 415 | (58 | ) | 72 | (142 | ) | 287 | |||||||||||||
| Total real estate loans | 5,101 | (778 | ) | 229 | (151 | ) | 4,401 | |||||||||||||
| Commercial | 660 | (617 | ) | 84 | 321 | 448 | ||||||||||||||
| Agriculture | 20 | — | 1 | 16 | 37 | |||||||||||||||
| Consumer installment loans | 156 | (75 | ) | 44 | 47 | 172 | ||||||||||||||
| All other loans | 3 | — | — | — | 3 | |||||||||||||||
| Unallocated | 256 | — | — | 19 | 275 | |||||||||||||||
| Total | $ | 6,196 | $ | (1,470 | ) | $ | 358 | $ | 252 | $ | 5,336 | |||||||||
18
| Allowance for Loan Losses | Recorded Investment in Loans | |||||||||||||||||||||||
|
As of December 31, 2018
(Dollars are in thousands) |
Individually
Evaluated for Impairment |
Collectively Evaluated for Impairment | Total |
Individually
Evaluated for Impairment |
Collectively Evaluated for Impairment | Total | ||||||||||||||||||
| Real estate secured: | ||||||||||||||||||||||||
| Commercial | $ | 40 | $ | 1,346 | $ | 1,386 | $ | 2,322 | $ | 138,540 | $ | 140,862 | ||||||||||||
|
Construction and land
development |
— | 202 | 202 | 114 | 35,005 | 35,119 | ||||||||||||||||||
| Residential 1-4 family | 132 | 2,205 | 2,437 | 3,311 | 246,635 | 249,946 | ||||||||||||||||||
| Multifamily | — | 89 | 89 | 75 | 13,421 | 13,496 | ||||||||||||||||||
| Farmland | 132 | 155 | 287 | 2,038 | 20,076 | 22,114 | ||||||||||||||||||
| Total real estate loans | 304 | 4,097 | 4,401 | 7,860 | 453,677 | 461,537 | ||||||||||||||||||
| Commercial | 13 | 435 | 448 | 109 | 55,048 | 55,157 | ||||||||||||||||||
| Agriculture | — | 37 | 37 | — | 5,266 | 5,266 | ||||||||||||||||||
| Consumer installment loans | 1 | 171 | 172 | 7 | 24,531 | 24,538 | ||||||||||||||||||
| All other loans | — | 3 | 3 | — | 598 | 598 | ||||||||||||||||||
| Unallocated | — | 275 | 275 | — | — | — | ||||||||||||||||||
| Total | $ | 318 | $ | 5,018 | $ | 5,336 | $ | 7,976 | $ | 539,120 | $ | 547,096 | ||||||||||||
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 any 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 September 30, 2019 there were $3.9 million in loans that are classified as troubled debt restructurings compared to $5.4 million at December 31, 2018. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. The following table presents information related to loans modified as troubled debt restructurings during the nine and three months ended September 30, 2019 and 2018.
|
For the nine months ended
September 30, 2019 |
For the nine months ended
September 30, 2018 |
|||||||||||||||||||||||
|
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 | — | $ | — | $ | — | — | $ | — | $ | — | ||||||||||||||
|
Construction and land
Development |
— | — | — | — | — | — | ||||||||||||||||||
| Residential 1-4 family | — | — | — | — | — | — | ||||||||||||||||||
| Multifamily | — | — | — | — | — | — | ||||||||||||||||||
| Farmland | 1 | 281 | 281 | — | — | — | ||||||||||||||||||
| Total real estate loans | — | — | — | — | — | — | ||||||||||||||||||
| Commercial | — | — | — | |||||||||||||||||||||
| Agriculture | — | — | — | — | — | — | ||||||||||||||||||
| Consumer installment loans | — | — | — | — | — | — | ||||||||||||||||||
| All other loans | — | — | — | — | — | — | ||||||||||||||||||
| Total | 1 | $ | 281 | $ | 281 | — | $ | — | $ | — | ||||||||||||||
19
During the nine months ended September 30, 2019, the Company modified one loan for which the modification was considered to be a troubled debt restructuring. This loan is secured by farmland and the modification is related to a court-ordered payment plan. No loans modified during the three months ended September 30, 2019 were considered to be troubled debt restructurings.
During the nine and three months ended September 30, 2018, the Company modified no loans for which the modification was considered to be a troubled debt restructuring.
No loans modified as a troubled debt restructurings defaulted during the three or nine months ended September 30, 2019 or 2018. 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 write down the carrying value of the loan.
NOTE 9 OTHER REAL ESTATE OWNED:
The following table summarizes the activity in other real estate owned for the nine months ended September 30, 2019 and the year ended December 31, 2018:
| (Dollars are in thousands) |
September 30,
2019 |
December 31, 2018 | ||||||
| Balance, beginning of period | $ | 5,937 | $ | 6,859 | ||||
| Additions | 492 | 1,719 | ||||||
| Proceeds from sales | (1,155 | ) | (1,405 | ) | ||||
| Proceeds from insurance claims | (19 | ) | — | |||||
| Loans made to finance sales | (647 | ) | (569 | ) | ||||
| Adjustment of carrying value | (214 | ) | (542 | ) | ||||
| Deferred gain from sales | — | 10 | ||||||
| Losses from sales | (55 | ) | (135 | ) | ||||
| Balance, end of period | $ | 4,339 | $ | 5,937 | ||||
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.
20
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
Investment Securities Available-for-Sale – Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Assets measured at fair value on a recurring basis are as follows. There were no liabilities measured at fair value on a recurring basis.
| (Dollars are in thousands) |
Quoted market price in active markets
(Level 1) |
Significant other observable inputs
(Level 2) |
Significant unobservable inputs
(Level 3) |
|||||||||
|
September 30, 2019
Available-for-sale investments |
||||||||||||
| U.S. Government Agencies | $ | — | $ | 16,581 | $ | — | ||||||
| Taxable municipals | — | 4,491 | — | |||||||||
| Corporate bonds | — | 5,531 | — | |||||||||
| Mortgage backed securities | — | 26,875 | — | |||||||||
| Total | $ | — | $ | 53,478 | $ | — | ||||||
|
December 31, 2018
Available-for-sale investments |
||||||||||||
| U.S. Government Agencies | $ | — | $ | 19,389 | $ | — | ||||||
| Taxable municipals | — | 4,313 | — | |||||||||
| Corporate bonds | — | 5,320 | — | |||||||||
| Mortgage backed securities | — | 30,385 | — | |||||||||
| Total | $ | — | $ | 59,407 | $ | — | ||||||
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.
Other Real Estate Owned – Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. OREO is 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 or management determines the fair value of the collateral to be further impaired below the appraised value and there is no observable market price, the Company records OREO as nonrecurring Level 3.
21
Assets measured at fair value on a non-recurring basis are as follows (for purpose of this table the impaired loans are shown net of the related allowance). There were no liabilities measured at fair value on a non-recurring basis.
| (Dollars are in thousands) |
Quoted market price in active markets
(Level 1) |
Significant other observable inputs
(Level 2) |
Significant unobservable inputs
(Level 3) |
|||||||||
| September 30, 2019 | ||||||||||||
| Other real estate owned | — | — | $ | 4,339 | ||||||||
| Impaired loans | — | — | 5,284 | |||||||||
| Total | — | — | $ | 9,623 | ||||||||
| December 31, 2018 | ||||||||||||
| Other real estate owned | — | — | $ | 5,937 | ||||||||
| Impaired loans | — | — | 7,658 | |||||||||
| Total | — | — | $ | 13,595 | ||||||||
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
|
(Dollars in thousands) |
Fair Value at September 30, 2019 |
|
Valuation Technique |
Significant Unobservable Inputs |
General Range of Significant Unobservable Input Values |
||||
| Impaired Loans | $ | 5,284 | $ | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 18% | |||
| Other Real Estate Owned | $ | 4,339 | $ | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 18% |
Fair Value of Financial Instruments
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.
The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
22
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows:
| Fair Value Measurements | ||||||||||||||||||||
| (Dollars are in thousands) |
Carrying
Amount |
Fair
Value |
Quoted market price in active markets
(Level 1) |
Significant other observable inputs
(Level 2) |
Significant unobservable inputs
(Level 3) |
|||||||||||||||
| September 30, 2019 | ||||||||||||||||||||
| Financial Instruments – Assets | ||||||||||||||||||||
| Net Loans | $ | 558,174 | $ | 545,837 | $ | — | $ | 540,553 | $ | 5,284 | ||||||||||
| Financial Instruments – Liabilities | ||||||||||||||||||||
| Time Deposits | 256,550 | 255,911 | — | 260,922 | — | |||||||||||||||
| FHLB Advances | 5,000 | 5,060 | — | 5,060 | — | |||||||||||||||
| Trust Preferred Securities | 16,496 | 13,586 | — | 13,586 | — | |||||||||||||||
| December 31, 2018 | ||||||||||||||||||||
| Financial Instruments – Assets | ||||||||||||||||||||
| Net Loans | $ | 541,760 | $ | 534,425 | $ | — | $ | 526,767 | $ | 7,658 | ||||||||||
| Financial Instruments– Liabilities | ||||||||||||||||||||
| Time Deposits | 258,850 | 258,671 | — | 258,671 | — | |||||||||||||||
| FHLB Advances | 7,000 | 7,215 | — | 7,215 | — | |||||||||||||||
| Trust Preferred Securities | 16,496 | 14,425 | — | 14,425 | — | |||||||||||||||
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, and accrued interest approximates fair value and are excluded from the table above.
In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at September 30, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.
23
NOTE 11 SALE AND LEASEBACK TRANSACTIONS:
In anticipation of certain sale and leaseback transactions, the Company adopted ASU No. 2016-02 Leases (Topic 842) in 2017. This ASU revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. As a result of this transaction the Company recognized initial right-to-use assets – operating leases of approximately $5.3 million, along with corresponding lease liabilities of approximately $5.3 million. The $5.3 million was determined by calculating the present value of the annual cash lease payments using a discount rate of 3.25%. The 3.25% discount rate was determined to be the 15-year incremental borrowing rate as of May 31, 2017.
On September 17, 2019, the Bank completed the sale and leaseback, with an unrelated third party of a branch office located in Lebanon Virginia. The sale resulted in a gain of $803 thousand. The execution of the 15 year lease resulted in the recognition of an additional right-to–use asset – operating lease of approximately $1.2 million, along with a corresponding lease liability of a similar amount. The $1.2 million was determined using a discount rate of 2.82% which was determined to be the 15-year incremental borrowing rate.
For the three and nine months ended September 30, 2019 and 2018 operating lease expenses were $123 thousand and $120 thousand, and $361 thousand and $359 thousand, respectively. At September 30, 2019, the weighted average remaining term for these leases was 13.08 years, and the weighted average discount rate was 3.16%.
The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At September 30, 2019, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
| 2019 | $ | 137 |
| 2020 | 534 | |
| 2021 | 511 | |
| 2022 | 530 | |
| 2023 | 544 | |
| Thereafter | 5,070 | |
| Total lease payments | 7,326 | |
| Less imputed interest | 1,393 | |
| Total | $ | 5,933 |
NOTE 12 REVENUE FROM CONTRACTS WITH CUSTOMERS
All our revenue from contracts with customers as defined in ASC 606 is recognized within Non-interest income. The following table presents Non-interest income by revenue stream for the three and nine months ended September 30, 2019 and 2018.
| For the three months ended | For the nine months ended | ||||||||
| September 30, | September 30, | ||||||||
| (Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | |||||
| Service charges and fees | $ | 947 | $ | 942 | $ | 2,660 | $ | 2,728 | |
| Card processing and interchange income | 800 | 720 | 2,276 | 2,109 | |||||
| Insurance and investment fees | 158 | 129 | 481 | 382 | |||||
| Other noninterest income | 950 | 126 | 1,184 | 319 | |||||
| Total Noninterest Income | $ | 2,855 | $ | 1,917 | $ | 6,601 | $ | 5,538 | |
24
NOTE 13 NONINTEREST EXPENSES:
Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||
| (Dollars are in thousands) | 2019 | 2018 | 2019 | 2018 | ||||
| Advertising | $ | 82 | $ | 79 | $ | 233 | $ | 340 |
| ATM network expense | 488 | 430 | 1,389 | 1,272 | ||||
| Legal and professional fees | 321 | 284 | 1,023 | 1,057 | ||||
| Loan related expenses | 194 | 150 | 484 | 480 | ||||
| Printing and supplies | 39 | 46 | 116 | 248 | ||||
| FDIC insurance premiums | (3) | 98 | 210 | 279 | ||||
| Other real estate owned, net | 99 | 411 | 525 | 772 | ||||
| Other | 572 | 501 | 1,670 | 1,840 | ||||
| Total other operating expenses | $ | 1,792 | $ | 1,999 | $ | 5,650 | $ | 6,288 |
NOTE 14 SUBSEQUENT EVENTS:
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.
NOTE 15 RECENT ACCOUNTING DEVELOPMENTS:
The following is a summary of recent authoritative announcements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance became effective January 1, 2018. The amendment does not apply to revenue associated with financial instruments, such as loans and investment securities available for sale, and therefore had no material effect on our consolidated financial statements. Information related to revenue from contracts with customers is summarized at Note 12.
In January 2016, per Accounting Standards Update (“ASU”) 2016-01, the FASB amended the Financial Instruments topic of the Accounting Standards Codification (“ASC”), to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments became effective on January 1, 2018 and did not have a material effect on the financial statements. As discussed in Note 10, the Company measured the fair value of its loan portfolio using an exit price notion as of September 30, 2019.
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As discussed in Note 11, the Company early adopted ASU No. 2016-02 Leases (Topic 842).
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams and a review of related contracts potentially affected by the ASU and, based on this assessment, the Company concluded that the ASU did not materially change the method in which the Company currently recognizes revenue for these revenue streams. As such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
25
In June 2016, per ASU No. 2016-13 ‘Financial Instruments – Credit Losses (Topic 326),’ the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. This standard was amended effective October 16, 2019. The amendments allow the Company to delay implementation until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the ASC. The ASU incorporates into the ASC recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company has assessed the impact on additional disclosure requirements for each of the standards and determined them to not have a material effect on its financial position, results of operations or cash flows.
In February 2017, the FASB amended the Other Income Topic of the ASC to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendment became effective on January 1, 2018 and did not have a material effect on the financial statements.
In September 2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance about certain public business entities (PBEs) electing to use the non-PBE effective dates solely to adopt the FASB’s new standards on revenue and leases. The amendments were effective upon issuance. The Company has assessed the impact of adoption of this guidance, and determined it does not have a material effect on its financial statements.
In November 2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance related to revenue recognition. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In February 2018, the FASB Issued (ASU 2018-02), Income Statement (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Cuts and Jobs Act. The Company early adopted this pronouncement by retrospective application to each period (or periods) in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The impact of the reclassification from other comprehensive income to retained earnings was $98 thousand as of December 31, 2018.
In February 2018, the FASB amended the Financial Instruments Topic of the ASC. The amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments were effective for the third quarter of 2018 subsequent to adopting the amendments in ASU 2016-01. All entities were able to early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they had adopted ASU 2016-01. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2018, the FASB updated the Debt Securities and the Regulated Operations Topics of the ASC. The amendments incorporate into the ASC recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. These amendments did not have a material effect on the Company’s financial statements.
In March 2018, the FASB updated the Income Taxes Topic of the ASC. The amendments incorporate into the ASC recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. These amendments did not have a material effect on the Company’s financial statements.
26
In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the ASC to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the Company’s financial statements.
In July 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to make narrow amendments to clarify how to apply certain aspects of the new standard. The amendments are effective for reporting periods beginning after December 15, 2018. These amendments did not have a material effect on the Company’s financial statements. As discussed in Note 17, the Company early adopted ASU No. 2016-02 Leases (Topic 842).
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In October 2018, the FASB amended the Derivatives and Hedging Topic of the Accounting Standards Codification to expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The amendments were effective for the Company for fiscal years beginning after December 15, 2018. Early adoption was permitted. These amendments did not have a material effect on the Company’s financial statements.
In October 2018, the FASB amended the Consolidation topic of the Accounting Standards Codification for determining whether a decision-making fee is a variable interest. The amendments require organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will apply a full retrospective approach in which financial statements for each individual prior period presented and the opening balances of the earliest period presented are adjusted to reflect the period-specific effects of applying the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2018, the FASB amended the Collaborative Arrangements Topic of the Accounting Standards Codification to clarify the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2018, the FASB issued guidance to amend the Financial Instruments—Credit Losses topic of the Accounting Standards Codification. The guidance aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements.
In December 2018, the FASB issued guidance providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments were effective for the Company for reporting periods beginning after December 15, 2018. Early adoption was permitted. These amendments did not have a material effect on the Company’s financial statements.
In March 2019, as part of the FASB’s ongoing annual improvements project, it amended the Leases Topic of the ASC to clarify the Codification more generally and/or to correct unintended application of guidance. The amendments relate to determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of cash flows – sales-type and direct financing leases, and transition disclosures related to the Accounting Changes and Error Corrections Topic. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
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In April 2019, as part of the FASB’s ongoing annual improvements project, it amended various Topics of the ASC related to financial instruments to clarify the Codification more generally and/or to correct unintended application of guidance. The amendments relate to Recognition and Measurement of Financial Assets and Financial Liabilities, Measurement of Credit Losses on Financial Instruments, and Targeted Improvements to Accounting for Hedging Activities. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In May 2019, the FASB issued targeted transition relief for entities which irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the amendments to the transition guidance for ASU No. 2016-13 will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Caution About Forward Looking Statements
We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, business strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.
Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.
Critical Accounting Policies
For discussion of our significant accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2018. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and related valuation allowance.
The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.
Our deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized in the foreseeable future, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.
Overview and Highlights
The Company had net income for the nine months ended September 30, 2019 of $1.6 million, or basic net income per share of $0.07, as compared to the nine months ended September 30, 2018 whereby the Company had net income of $239 thousand, or $0.01 basic net income per share.
The Company had net income for the quarter ended September 30, 2019 of $876 thousand, or basic net income per share of $0.04, as compared to $208 thousand, or basic net income per share of $0.01, for the quarter ended September 30, 2018.
Total assets increased $24.8 million to $706.9 million at September 30, 2019 from $682.1 million at December 31, 2018.
The Bank purchased a three story building in Bristol, Virginia on August 30, 2019. The site formerly housed an office of another financial institution but was closed when that institution was acquired in 2018. The site will be renovated and plans are for it to be operational during the third quarter of 2020. There is currently a nearby location from which we provide Interactive Teller Machine (“ITM”) services, which we plan to close and dispose. Regulatory approvals were obtained in October 2019 to establish this new branch.
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This expansion fits in with our stated objective of expanding our presence in the Tri-Cities market area. The location is within the Bristol business district and will allow us to provide retail consumer, commercial banking and financial services within Bristol and the surrounding area.
Highlights as of and for the nine and three-month periods ended September 30, 2019 include:
| · | Deposit balances increased $25.6 million, allowing reductions of $5.6 million in borrowings, supporting loan growth and increasing cash available by $20.5 million to support additional loan growth. |
| · | Loan balances increased $11.1 million, despite the sale of $4.4 million of non- and under-performing loans during the second quarter. |
| · | Asset quality continues to improve, including reduced OREO balances and an improved ratio of nonperforming assets, as compared to December 31, 2018 and years prior. |
| · | Provision expense was elevated due to charge-offs of three commercial loan relationships. |
| · | All other income statement lines continue to trend in a positive direction – net interest income is higher, non-interest income is higher and non-interest expense is lower. |
| · | Net interest income and net interest margin improved, even as cost of funds increased, due to increased balances of loans and cash earning interest in other banks. |
| · | A new right-of-use asset was created as a result of the sale and leaseback of our Lebanon location, resulting in a gain of $803 thousand. |
| · | A credit of $103 thousand was received from the FDIC, resulting in net zero deposit insurance expense for the third quarter. |
Comparison of the Nine months ended September 30, 2019 to September 30, 2018
Net income for the nine months ended September 30, 2019 was $1.6 million, an increase of $1.4 million over the same period in 2018. Interest and dividend income increased $2.0 million, or 9.7%, to $23.2 million for the first nine months of 2019 compared to $21.2 million for the same period in 2018. The primary driver of this improvement was interest income on loans, which increased $1.8 million, or 9.1%, to $21.4 million for the first nine months of 2019 from $19.6 million for the same period in 2018. Increased average loan balances provided the majority of this improvement in interest income on loans. Deposits with other banks also provided an additional $362 thousand of interest income, mainly due to increased average balances. The increase in total interest income was also supported by an improvement in the annualized yield on interest-earning assets, which increased to 4.75% for the first nine months of 2019 compared to 4.62% for the first nine months of 2018.
Although interest expense increased $1.4 million, to $4.5 million for the first nine months of 2019 from $3.1 million for the first nine months of 2018, net interest income still increased because increases in interest income mitigated this increase in interest expense. The primary driver of this increased interest expense is higher interest rates on time deposits and money market accounts, which also contributed to an increase in the annualized cost of funds to 0.92% for the nine months ended September 30, 2019 compared to 0.66% for the nine months ended September 30, 2018.
We recognized a provision for loan losses of $1.3 million during the first nine months of 2019, compared to $189 thousand for the same period in 2018. The increase is due to $1.0 million of charge-offs against the allowance for loan losses related to three commercial loan relationships. Provisions are recognized to maintain the allowance for loan losses at a level that deemed appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized.
Noninterest income increased $1.1 million to $6.6 million for the nine months ended September 30, 2019 from $5.5 million for the same period in 2018. The main driver was an $803 thousand gain on the sale and leaseback transaction completed on our Lebanon office. Increased card processing and interchange income of $167 thousand also contributed to the improvement in noninterest income.
Noninterest expense decreased $1.1 million, or 4.9%, to $22.0 million for the first nine months of 2019 from $23.1 million for the same period in 2018. Increases in salaries and employee benefits of $92 thousand were more than offset by a decrease of $433 thousand in occupancy and equipment expense and a decrease of $638 thousand in other operating expense. Data processing and telecommunication costs show a decrease of $144 thousand or 7.0%, as costs savings related to the renegotiation of data circuit and phone services, earlier in the year, are being realized. The decrease in other operating expense is largely attributable to various non-recurring write-downs and losses of approximately $634 thousand taken during the nine months of 2018 that were not repeated in 2019. These were related to previously capitalized costs advanced for insurance on previously charged-off loans, supplies and marketing inventory items, loan resolutions and other real estate owned. During the nine months ended September 30, 2019 and 2018, costs for fees related to facilitating sales of loans totaling $158 thousand and $61 thousand, respectively, were recorded.
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Our efficiency ratio, a non-GAAP measure which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 86.8% for the first nine months of 2019 compared to 97.8% for the first nine months of 2018.
Comparison of the Three Months ended September 30, 2019 to September 30, 2018
The Company’s primary source of income is net interest income, which increased $320 thousand to $6.3 million during the third quarter of 2019 compared to $6.0 million during the third quarter of 2018. This improvement was driven mainly by increased average balances of loans, but also by a higher net interest margin, which increased to 3.90% from 3.84%. Although the cost of funds increased to 0.92% from 0.74%, the yield on earning assets increased to 4.81% from 4.58%. While interest income increased $642 thousand, or 8.9%, interest expense increased only $322 thousand, or 27.7%.
The provision for loan losses increased $957 thousand, to $1.0 million for the third quarter of 2019 compared to $63 thousand for the third quarter of 2018. As noted above, the increase in the provision was driven mainly by charge-offs of three commercial loan relationships.
Noninterest income for the third quarter of 2019 was $2.9 million, an increase of $938 thousand, or 48.9%, when compared to the same period in 2018. This increase was driven primarily by an $803 thousand gain realized on the sale and leaseback of the Lebanon office mentioned above. Card processing and interchange fees increased $80 thousand, or 11.1%, for the comparative quarters-ended, as customer card usage continues to increase. Revenue from financial services increased $29 thousand, or 22.5% as efforts to increase our presence in this area improve.
Noninterest expense decreased $500 thousand, or 6.6%, to $7.1 million during the third quarter of 2019 as compared to $7.6 million for the third quarter of 2018. This was driven by a decrease in salaries and benefits expenses of $70 thousand, a decrease in occupancy and equipment expense of $121 thousand, a decrease in data processing and telecommunication expense of $102 thousand and a decrease in other operating expenses of $207 thousand. The main driver of the reduction in other operating expense is $339 thousand of write-downs on other real estate owned that occurred in the third quarter of 2018, with none occurring in the third quarter of 2019. Another driver of the reduction in other operating expense is a credit received from the FDIC of $103 thousand as a result of our ability to utilize Small Bank assessment credits during the quarter. The lower occupancy and equipment expenses is due to reduced depreciation, as equipment, furniture and vehicles reach the end of their estimated useful lives, combined with efforts to control repairs and maintenance costs, by renegotiating existing or renewing service contracts at lower costs.
The efficiency ratio, a non-GAAP measure, improved to 76.9% for the third quarter of 2019 from 95.4% for the third quarter of 2018, due to all the improvements discussed above. Plans implemented in the latter half of 2018 and throughout 2019 have resulted in reduced operating costs and improved the efficiency ratio.
We expect further improvements in operating expenses as we continue to assess staffing, service providers and existing and renewing contractual relationships. We have already begun to see benefits from renegotiating data circuit and telecom contracts, which should provide annualized savings of approximately $198 thousand over the next five years. We are completing negotiations with our card services provider and anticipate annualized savings of approximately $400 thousand over a five year period commencing in 2020. During the third quarter of 2019, we implemented a restructuring of our credit and loan operations functions and other administrative positions, resulting in the elimination of ten positions; with a net reduction of five employees, as some affected personnel filled other vacant positions. The staffing changes are estimated to result in annualized savings of $580 thousand.
Aside from the efforts to improve efficiencies and reduce costs made thus far, we have retained the services of a consulting firm to further review our processes and procedures to identify areas where we can enhance revenue or better manage costs. When completed and implemented, it is estimated that the pre-tax annual benefits will exceed $1 million.
Balance Sheet
Total assets increased $24.8 million, or 3.6%, to $706.9 million at September 30, 2019 from $682.1 million at December 31, 2018. Increases in interest-bearing deposits in other banks of $16.7 million and increases in loans of $11.1 million were funded primarily by increases in deposits of $25.6 million. Total assets are expected to continue growing due to our plan to conservatively and prudently grow the loan portfolio. Interest-bearing deposits include approximately $19 million of funds deposited by a related party early in 2019, which is considered to be temporary.
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Total investments decreased $5.9 million, or 10.0%, to $53.5 million at September 30, 2019 from $59.4 million at December 31, 2018, primarily due to principal paydowns of $8.0 million, offset by purchases of $790 thousand and unrealized gains of $1.7 million. There were no sales of investments during the three or nine months ended September 30, 2019.
Loans held for sale is a new line on the balance sheet this year and totals $571 thousand as of September 30, 2019. These loans are related to the secondary mortgage loan program, which are now being originated in the Bank’s name. Prior to the second quarter of 2019, secondary mortgage program loans were originated and funded by the purchaser.
Loans receivable increased $11.1 million, or 2.0%, to $558.2 million at September 30, 2019 as compared to $547.1 million at December 31, 2018. We believe our focus on developing new and existing lending relationships should continue to grow the loan portfolio, subject to the economy and heightened competition in our markets. While loan demand has lessened somewhat from that experienced in the past two years, we continue to see opportunities to provide credit at reasonable terms. At September 30, 2019 approximately $12.6 million in new loans were in the pipeline. Through October 31, 2019 approximately $3.0 million of these loans have closed.
Total deposits increased $25.6 million, or 4.3%, to $621.6 million at September 30, 2019 from $596.0 million at December 31, 2018. Noninterest-bearing demand deposits increased $11.7 million, or 7.1%. Interest-bearing deposits increased $13.9 million, or 3.2%, driven by increases in nearly every type of retail account, with the exception of certain time deposit maturities which we chose not to replace at higher interest rates. This allowed us to reduce wholesale deposits, FHLB advances and federal funds purchased by $2.4 million, $2.0 million and $3.6 million, respectively, during the first nine months of this year. Due to competitive pressures and the upward pressure on interest rates during the first five months of the year, we saw increases in the interest we pay on deposits in 2019. More recent financial and economic events have resulted in three reductions in the federal funds rate so far in the second half of 2019. While pressure to lower interest rates may continue for the foreseeable future, it is not certain that this will result in a systemic lowering of rates paid on deposit products if competition remains to attract and retain deposits to support future loan growth. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
Trust Preferred Securities of $16.5 million at September 30, 2019, were unchanged compared to December 31, 2018.
Borrowed funds from the FHLB were reduced to $5.0 million at September 30, 2019 from $7.0 million at December 31, 2018 as we chose not to replace one of our two advances. The following table presents the FHLB advances:
| (Dollars in thousands) | Maturity Date | Rate |
September 30, 2019 |
December 31, 2018 | ||||
| Fixed Rate Hybrid | 6/28/2019 | 0.99% | - | 2,000 | ||||
| Fixed Rate Hybrid | 6/30/2021 | 1.34% | 5,000 | 5,000 | ||||
| Total | $ | 5,000 | $ | 7,000 |
Total equity at September 30, 2019 was $54.2 million, an increase of $3.0 million, or 5.8%, compared to $51.3 million at December 31, 2018. Net income of $1.6 million and comprehensive income of $1.3 million drove this increase.
Asset Quality
Non-performing assets declined $3.3 million, or 27.1%, during the first nine months of 2019. Other real estate owned (OREO) balances decreased by $1.6 million and nonaccruing loan balances decreased by $1.7 million. As a result, the ratio of nonperforming assets to total assets decreased to 1.27% at September 30, 2019, compared to 1.80% at December 31, 2018.
Nonperforming assets include nonaccrual loans, other real estate owned and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccruing status once they reach 90 days past due. The makeup of the nonaccruing loans is primarily those secured by residential mortgages, commercial businesses and farmland, in that order. Other real estate owned is primarily made up of commercial and single family residential properties. We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets. We are mindful of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.
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Nonperforming assets consisted of the following:
|
September 30,
2019 |
December 31, 2018 | |||||||
| Nonaccrual loans | $ | 4,636 | $ | 6,369 | ||||
| Loans past due more than 90 days, still accruing | — | — | ||||||
| Nonperforming loans | 4,636 | 6,369 | ||||||
| Other real estate owned | 4,339 | 5,937 | ||||||
| Nonperforming assets | $ | 8,975 | $ | 12,306 | ||||
| Nonperforming loans/Total loans at period end | 0.83 | % | 1.16 | % | ||||
| Nonperforming assets/Total assets at period end | 1.27 | % | 1.80 | % | ||||
All OREO properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first nine months of 2019, $492 thousand of other real estate owned was acquired as a result of settlement of foreclosed loans. Foreclosed real estate sales for the first nine months of 2019 totaled $1.8 million, resulting in a net loss of $55 thousand. In an effort to reduce our level of foreclosed properties, we maintain the aggressive approach toward liquidating properties, exhibited over the past, by making pricing adjustments to expedite sales. This includes valuation adjustments of $214 thousand recorded thus far in 2019. As we continue these efforts, additional losses could occur, while reducing future carrying costs. We do have lease agreements on certain OREO properties which are generating rental income at market rates. Rental income on OREO properties was $63 thousand for the first nine months of 2019 compared to $169 thousand for the first nine months of 2018. The decrease in revenue is primarily due to a vacancy at a commercial property as the site was being prepared for sale, combined with a general decrease in properties owned. While the original sale of the commercial property was not consummated, a contract for the sale of this property was executed in October, with closing anticipated during the fourth quarter of 2019.
Loans rated substandard or below were $4.8 million at September 30, 2019, a decrease of $2.5 million from $7.3 million at December 31, 2018. Total past due loans decreased from $6.8 million at December 31, 2018, to $6.7 million at September 30, 2019.
Our allowance for loan losses at September 30, 2019 was $5.2 million or 0.92% of total loans as compared to $5.3 million, or 0.98% of total loans at December 31, 2018. Impaired loans decreased $2.5 million, or 31.0%, to $5.5 million with an estimated related specific allowance of $221 thousand for potential losses at September 30, 2019 as compared to $8.0 million in impaired loans with an estimated related allowance of $318 thousand at the end of 2018. A provision of $1.3 million was recognized for the first nine months of 2019 and $189 thousand for the first nine months of 2018. In the first nine months of 2019, net charge-offs were $1.5 million, or 0.21% of average loans, as compared to $1.1 million, or 0.16% of average loans for the same period of 2018. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.
| (Dollars in thousands) |
September 30,
2019 |
December 31, 2018 | ||||||
| Specific allowance | $ | 221 | $ | 318 | ||||
| General allowance | 4,929 | 5,018 | ||||||
| Total allowance | $ | 5,150 | $ | 5,336 | ||||
| Impaired loans | $ | 5,497 | $ | 7,976 | ||||
| Other loans | 552,677 | 539,120 | ||||||
| Total loans | $ | 558,174 | $ | 547,096 | ||||
| Total allowance/Total loans | 0.92 | % | 0.98 | % | ||||
| General allowance/Other loans | 0.89 | % | 0.93 | % | ||||
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Deferred Tax Asset and Income Taxes
Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset of $4.7 million and $5.5 million existed at September 30, 2019 and December 31, 2018, respectively. Our income tax expense was computed at the revised corporate income tax rate of 21% of taxable income for 2018 and 2019 due to the enactment of the Tax Cuts and Jobs Act (“TCJA”) which became law on December 22, 2017. Income tax expense was previously calculated at 34% of taxable income. We do not have significant nontaxable income or nondeductible expenses.
Capital Resources
Total stockholders’ equity at September 30, 2019 was $54.2 million compared to $51.3 million at December 31, 2018, an increase of $3.0 million. The increase includes net unrealized gains of $1.3 million related to the available-for-sale investment portfolio, net of tax, plus net income of $1.6 million for the nine-month period.
The Company meets the eligibility criteria to be classified as 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 not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in the following table:
| Well-Capitalized Regulatory Threshold |
September 30,
2019 |
December 31, 2018 | ||||||||||
| Tier 1 leverage | 5.00 | % | 9.50 | % | 9.59 | % | ||||||
| Common equity Tier 1 | 6.50 | % | 13.60 | % | 13.29 | % | ||||||
| Tier 1 risk-based capital | 8.00 | % | 13.60 | % | 13.29 | % | ||||||
| Total risk-based capital | 10.00 | % | 14.65 | % | 14.39 | % | ||||||
At September 30, 2019, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015. As a result of these new rules the Company and Bank are now subject to a Common Equity Tier 1 ratio set out above.
The tangible book value per common share was $2.26 at September 30, 2019 compared to $2.19 at December 31, 2018. Other key performance indicators are as follows:
| Three months ended September 30 | Nine months ended September 30 | ||||
| 2019 | 2018 | 2019 | 2018 | ||
| Return on average assets 1 | 0.50% | 0.12% | 0.31% | 0.05% | |
| Return on average equity 1 | 6.49% | 1.64% | 4.15% | 0.64% | |
| Average equity to average assets | 7.63% | 7.35% | 7.40% | 7.44% | |
1 Annualized
Total assets increased during the first nine months of 2019 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and the core deposit base of the Bank. Under current economic conditions, we believe it is prudent to continue to increase capital to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates further. Based upon projections, we believe our current capital levels will be sufficient to support the Bank’s planned asset growth.
No cash dividends have been paid historically and we do not anticipate paying a cash dividend in the foreseeable future as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable.
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Liquidity
We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $95.0 million at September 30, 2019, an increase from $79.5 million at December 31, 2018. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2019.
At September 30, 2019, all of our investments were classified as available-for-sale. These investments provide a source of liquidity in the amount of $46.3 million, which is net of the $7.2 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.
Our loan to deposit ratio was 89.7% at September 30, 2019 and 91.80% at December 31, 2018. We anticipate this ratio to remain at or below 90% for the foreseeable future.
Available third-party sources of liquidity at September 30, 2019 include the following: a line of credit with the Federal Home Loan Bank of Atlanta, access to brokered certificates of deposit markets and internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. We also have the ability to borrow $20.0 million in secured and unsecured federal funds through credit facilities extended by correspondent banks.
The Bank’s total line of credit with the FHLB is $175.2 million, with unused availability at September 30, 2019 of $153.2 million. One advance was outstanding at September 30, 2019 for $5.0 million and the line also secures letters of credit totaling $17.0 million. The advance and letters of credit are secured by a blanket lien on our residential real estate loans which amounted to $143.0 million at September 30, 2019.
The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (“CDARS”). At September 30, 2019, we held no brokered deposits and $11.0 million in CDARS reciprocal time deposits.
The Bank is also a member of an internet certificate of deposit network whereby we may purchase funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in a liquidity crisis event.
Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, we do not anticipate using this funding source except as a last resort.
With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control.
The bank holding company has approximately $243 thousand in cash on deposit at the Bank as of September 30, 2019. These funds will be used to pay operating expenses, trust preferred interest payments, and provide additional capital injections to the Bank, if needed. The Company is making quarterly interest payments on the trust preferred securities. During the first nine months of 2019, the bank paid $610,000 in cash dividends to the holding company.
Off Balance Sheet Items and Contractual Obligations
There have been no material changes during the quarter ended September 30, 2019 to the off-balance sheet items and the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2018.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
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| Item 4. | Controls and Procedures |
We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our “CEO”) and our Executive Vice President and Chief Financial Officer (our “CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II Other Information
| Item 1. | Legal Proceedings |
In the course of operations, we may become a party to legal proceedings.
There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.
| Item 1A. | Risk Factors |
Not Applicable.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not Applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
See Index of Exhibits.
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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 PEOPLES BANKSHARES, INC.
(Registrant) |
||
| By: |
/s/ C. TODD ASBURY |
|
| C. Todd Asbury | ||
|
President and Chief Executive Officer |
||
| Date: | November 13, 2019 | |
| By: |
/s/ JOHN J. BOCZAR
|
|
| John J. Boczar | ||
| Executive Vice President and Chief Financial Officer | ||
| Date: |
November 13, 2019
|
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Index of Exhibits
___________________
* Denotes management contract.
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