SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2015

OR

For the transition period from                         to                        

Commission File No. 000-55530

New Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

(269) 469-2222

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  x    NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  o

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o    NO  x

As of November 13, 2015, the latest practicable date, 696,600 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

 

 

 

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New Bancorp, Inc.

Form 10-Q

 

Index

 

 

 

 

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EXPLANATORY NOTE

New Bancorp, Inc., a Maryland corporation (the “Company” or the “Registrant”), was formed on June 3, 2015 to serve as the savings and loan holding company for New Buffalo Savings Bank (the “Bank”) as part of the Bank’s mutual-to-stock conversion.  As of September 30, 2015, the conversion had not been completed, and, as of that date, the Registrant had no assets or liabilities, and had not conducted any business other than that of an organizational nature.  Accordingly, financial and other information of the Bank is included in this Quarterly Report.

 

 

 

 

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Part I. – Financial Information

New Buffalo Savings Bank

Condensed Balance Sheets

September 30, 2015 (Unaudited) and December 31, 2014

(In Thousands)

 

 

The accompanying notes are an integral part of these financial statements.

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New Buffalo Savings Bank

Condensed Statements of Operations

For the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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New Buffalo Savings Bank

Condensed Statements of Comprehensive Loss (Unaudited)

For the Three and Nine Months Ended September 30, 2015 and 2014

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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New Buffalo Savings Bank

Condensed Statements of Changes in Equity (Unaudited)

For the Nine Months Ended September 30, 2015 and 2014

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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New Buffalo Savings Bank

Condensed Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2015 and 2014

(In Thousands)

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The accompanying condensed balance sheet of New Buffalo Savings Bank (the Bank) as of December 31, 2014, which has been derived from audited financial statements, and the unaudited condensed financial statements of the Bank as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014, were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and notes thereto of the Bank for the year ended December 31, 2014 included in the Registrant’s Form S-1. Reference is made to the accounting policies of the Bank described in the Notes to the Financial Statements contained in the Form S-1.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of September 30, 2015 and the results of operations for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014. All interim amounts have not been audited and the results of operations for the three and nine months ended September 30, 2015 herein, are not necessarily indicative of the results of operations to be expected for the entire year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of deferred tax assets and fair values of financial instruments.

 

 

The Bank had no investment securities at September 30, 2015 and December 31, 2014.  The Bank had no sales of investment securities during the three and nine month periods ended September 30, 2015 and 2014.

 

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The Company’s loan and allowance for loan losses policies are as follows:

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses and any unamortized deferred fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process.  Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Classes of loans at September 30, 2015 and December 31, 2014 include:

 

 

The risk characteristics applicable to each segment of the loan portfolio are described below:

Residential Real Estate:  The residential real estate loans are generally secured by owner-occupied 1-4 family residences.  The Bank’s portfolio of home equity loans totaled $3.7 million and $3.4 million at September 30, 2015 and December 31, 2014, respectively, the preponderance of which were secured by first liens, or by second liens on properties where the Bank also holds the first lien.  Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.  Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income.  Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate:  Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.

 

Construction and Land:  Construction and land loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners.  Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained.  These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing.  Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Bank’s market area.

Commercial Business:  The commercial business loan portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions.  The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation.  Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer:  The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes.  Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose.  Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The following tables present by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 and the recorded investment in loans and impairment method as of September 30, 2015 and December 31, 2014:

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

 

 

 

Internal Risk Categories

The Bank has adopted a standard loan grading system for all loans.  Loans are selected for a grading review based on certain characteristics, including concentrations of credit and upon delinquency of 90 days or more.  Definitions are as follows:

Pass: Loans categorized as Pass are higher quality loans that do not fit any of the other categories described below.

Special Mention: The loans identified as special mention have an obvious flaw or a potential weakness that deserves special management attention, but which has not yet impacted collectability.  These flaws or weaknesses, if left uncorrected, may result in the deterioration of the prospects of repayment or the deterioration of the Bank’s credit position.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Substandard: These are loans with a well-defined weakness, where the Bank has a serious concern about the borrower’s ability to make full repayment if the weaknesses are not corrected.  The loan may contain a flaw, which could impact the borrower’s ability to repay, or the borrower’s continuance as a “going concern”.  When collateral values are not sufficient to secure the loan and other weaknesses are present, the loan may be rated substandard.  A loan will also be graded substandard when full repayment is expected, but it must come from the liquidation of collateral.  All loans that are past due 90 days or more are classified as substandard.

Doubtful: These are loans with major defined weaknesses, where future charge-off of a part of the credit is highly likely.  The primary repayment source is no longer viable and the viability of the secondary source of repayment is in doubt.  The amount of loss is uncertain due to circumstances within the credit that are not yet fully developed and the loan is rated “Doubtful” until the loss can be accurately estimated.

Loss: These are loans that represent near term charge-offs.  Loans classified as loss are considered uncollectible and of such little value that it is not desirable to continue carrying them as assets on the Bank’s financial statements, even though partial recovery may be possible at some future time.

The following tables present the credit risk profile of the Bank’s loan portfolio based on internal rating category and payment activity as of September 30, 2015 and December 31, 2014:

 

 

 

The Bank evaluates the loan risk grading system definitions and allowance for loan losses methodology on an ongoing basis.  No significant changes were made to either during the past year.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The following tables present the Bank’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2015 and December 31, 2014:

 

 

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming multi-family and commercial loans but also include loans modified in troubled debt restructurings.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The following table presents impaired loans as of September 30, 2015 and for the three month periods ended September 30, 2015 and 2014:

 

 

The following table presents impaired loan information for the nine month periods ended September 30, 2015 and 2014:

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The following table presents impaired loans as of December 31, 2014:

 

 

The following table presents the Bank’s nonaccrual loans at September 30, 2015 and December 31, 2014.  The table excludes performing troubled debt restructurings.

 

 

At September 30, 2015 (unaudited) and December 31, 2014, the Bank had certain loans that were modified in troubled debt restructurings and impaired.  The modification of terms of such loans generally included one or a combination of the following: an extension of the maturity date or a reduction of the stated interest rate.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The following tables present information regarding troubled debt restructurings by class for the three and nine months ended September 30, 2015 and 2014.  Newly classified troubled debt restructurings are as follows:

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Newly restructured loans by type of modification are as follows for the three and nine months ended September 30, 2015 and 2014.

 

 

The troubled debt restructurings described above did not increase the allowance for loan losses or result in a charge-off during the three and nine months ended September 30, 2015 and 2014.

The Bank had no troubled debt restructurings modified in the twelve months ended September 30, 2015 and 2014 that subsequently defaulted.  A loan is considered to be in payment default once it is 30 days contractually past due under the loan’s modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s internal underwriting policy.

 

 

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory- and possibly additional discretionary- actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.  

Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below), for periods through December 31, 2014, of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to total assets (as defined).  

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

At September 30, 2015, quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below), of total capital, Tier 1 capital and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital to average total assets.

Management believes, as of September 30, 2015 (unaudited) and December 31, 2014, that the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2015 (unaudited) and December 31, 2014, the most recent notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios are presented in the following table:

 

 

 

Fair value is the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.  Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs.  There is a hierarchy of three levels of inputs that may be used to measure fair value:

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Nonrecurring Measurements

The following table presents fair value measurements of assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which fair value measurements fall at September 30, 2015 and December 31, 2014:

 

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell.  Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Bank considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management.  Appraisals are reviewed for accuracy and consistency by management.  Appraisers are selected from the list of approved appraisers maintained by management.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.  These discounts and estimates are developed by management by comparison to historical results.

Foreclosed Real Estate Held for Sale

Foreclosed real estate held for sale is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired.  Estimated fair value of foreclosed real estate is based on appraisals or evaluations.  Foreclosed real estate is classified within Level 3 of the fair value hierarchy.

Appraisals of foreclosed real estate are obtained when the real estate is acquired and subsequently as deemed necessary by management.  Appraisals are reviewed for accuracy and consistency by the management.  Appraisers are selected from the list of approved appraisers maintained by management.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements:

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Fair Value of Financial Instruments

The following table presents the estimated fair values of the Bank’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2015 and December 31, 2014.

 

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Due from Banks and Interest-earning Demand Deposits

The carrying amount approximates fair value.

Interest-earning Time Deposits in Banks

The carrying amount approximates fair value.

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

Loans Held For Sale

Fair value is based on prices quoted by the U.S. government sponsored agencies generally used by the Bank in sales transactions.

Loans

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities.  The market rates used are based on current rates the Bank would impose for similar loans and reflect a market participant assumption about risks associated with nonperformance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

Federal Home Loan Bank Stock

Fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.

Accrued Interest Receivable and Payable

The carrying amount approximates fair value.  The carrying amount is determined using the interest rate, balance and last payment date.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices.  Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate.

Deposits

Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities.  The market rates used were obtained from a knowledgeable independent third party and reviewed by the Bank.  The rates were the average of current rates offered by local competitors of the Bank.

The estimated fair value of demand, NOW, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.

Federal Funds Purchased

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Fair value is estimated by discounting the future cash flows using rates of similar advances with similar maturities.  These rates were obtained from current rates offered by the Federal Home Loan Bank.

Stock Subscription Proceeds in Escrow

The carrying amounts of stock subscription proceeds in escrow approximate fair value resulting in a Level 1 classification.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

 

 

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

The Company is an emerging growth company and as such will be subject to the effective dates noted for the private companies if they differ from the effective dates noted for public companies.

Financial Accounting Standards Board (FASB) ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.  The Company will adopt this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results or operations.  

FASB ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within the reporting period, and should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Early adoption is prohibited. With the issuance of ASU 2015-14 on July 9, 2015, FASB approved the deferral of the effective date of ASU 2014-09 for one year giving companies the option to early adopt using the original effective dates. Management is currently in the process of evaluating the impact of the amended guidance on the Bank’s financial statements.

 

 

On May 28, 2015, the Bank’s Board of Directors adopted a Plan of Conversion (the “Plan”) to convert from a federal mutual savings bank to a federal stock savings bank (the “Conversion”).  A new Maryland-chartered corporation, New Bancorp, Inc. (the “Company”), was formed in June 2015, which, upon consummation of the Conversion and offering, became the savings and loan holding company of the Bank. The Plan was subject to approval of the members of the Bank, which approval was received at a Special Meeting of Members on September 15, 2015.

Additionally, the Plan was subject to the final approval of the Office of the Comptroller of the Currency (“OCC”) and the formation of the Company as the holding company of the Bank, upon consummation of the Conversion, is subject to the approval of the Board of Governors of the Federal Reserve System (“FRB”). As part of the Conversion and offering, the Company filed a registration statement with the U.S. Securities and Exchange Commission.  Upon receipt of the final approval of the OCC and the FRB and the consummation of the Conversion and offering, the Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock to eligible depositors and borrowers of the Bank and the public pursuant to an independent valuation appraisal of the Bank and the Company on a converted basis that has been conducted by an independent appraisal firm that is experienced in appraising financial institutions in connection with mutual to stock conversions.  The Conversion was completed on October 19, 2015 and resulted in the issuance of 696,600 common shares by the Company.  

The cost of the Conversion and issuing the capital stock was deferred and deducted from the proceeds of the offering.  Through September 30, 2015, the Bank had incurred approximately $579,000 in conversion costs, which are included in prepaid expenses and other assets on the condensed balance sheet.

In accordance with OCC regulations, at the time of the Conversion, the Bank substantially restricted retained earnings by establishing a liquidation account.  The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after the Conversion.  The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account

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New Buffalo Savings Bank

Notes to Condensed Financial Statements

 

holder’s interest in the liquidation account.  In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.  The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

 

 

 

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General

Management’s discussion and analysis of the financial condition at September 30, 2015 and results of operations for the three and nine months ended September 30, 2015 and 2014 is intended to assist in understanding the financial condition and results of operations of the Bank.  The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

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Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in New Bancorp, Inc.’s Prospectus dated August 12, 2015, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on August 20, 2015.

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Total Assets. Total assets were $91.4 million at September 30, 2015, an increase of $675,000, or 0.7%, compared to $90.7 million at December 31, 2014. The increase was due primarily to an increase of $962,000 in net loans offset in part by a decrease in cash and cash equivalents of $438,000.

Loans, net and Loans Held for Sale. Loans, net increased $962,000, or 1.3%, to $73.3 million at September 30, 2015 from $72.4 million at December 31, 2014.  During the nine months ended September 30, 2015, we originated $21.3 million of loans and loans held for sale, consisting primarily of $16.8 million of one- to four-family residential real estate loans, $3.4 million of commercial real estate loans, $822,000 of construction and land loans, $119,000 of commercial business loans and $244,000 of consumer loans, and sold $10.1 million of loans. During the nine months ended September 30, 2015, one- to four-family residential real estate loans increased $2.9 million, or 7.6%, to $40.3 million at September 30, 2015, from $37.5 million at December 31, 2014, while commercial real estate loans decreased $277,000, or 1.0%, to $26.4 million at September 30, 2015 and construction and land loans decreased $1.3 million, or 16.0% to $6.6 million at September 30, 2015.  During the nine months ended September 30, 2015, management transferred $2.1 million of portfolio loans to loans held for sale and sold the transferred loans during the period. Additionally, during the nine months ended September 30, 2015, sales of loans, including both those that were originated during the period and those held for sale at December 31, 2014, amounted to $8.1 million. Loans held for sale were $272,000 at September 30, 2015 compared to $581,000 at December 31, 2014.

We continue to pursue a strategy to maximize our income by growing and diversifying our loan portfolio, with an emphasis on increasing our commercial real estate, commercial business and home equity loans, and continually reviewing our existing portfolio for income, liquidity and interest rate risk mitigation opportunities consistent with our strategic objectives.  Recent loan originations

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have been achieved amid strong competition for commercial real estate and residential real estate loans in our market area in the current low interest rate environment.  We also sell certain fixed-rate, 30-year one- to four-family residential real estate loans, primarily on a servicing-retained basis, in transactions with the Federal Home Loan Bank of Indianapolis (“FHLB-Indianapolis”), through its mortgage purchase program, and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Subject to our ongoing interest rate risk analysis, we generally intend to continue to sell the fixed-rate, 30-year residential real estate loans that we originate.

Bank Owned Life Insurance. At September 30, 2015, our investment in bank owned life insurance was $5.2 million, an increase of $124,000, from $5.1 million at December 31, 2014.  We invested in bank owned life insurance to provide us with a funding offset for certain benefit plan obligations.  While these benefit plans have been terminated and the obligations have been paid, bank owned life insurance also generally provides us noninterest income that is non-taxable.  Federal bank regulatory guidance cautions against an investment in bank owned life insurance that exceeds 25% of an institution’s Tier 1 capital.  The guidance states that an institution which has an investment in bank owned life insurance exceeding this amount make a determination that the amount of investment does not constitute an imprudent capital concentration. We have not made additional contributions to bank owned life insurance since 2002.

Foreclosed Real Estate. Foreclosed real estate increased $60,000 to $308,000 at September 30, 2015 from $248,000 at December 31, 2014, as we added one property through foreclosure, which was offset by sales totaling $165,000 and impairment charges of $111,000.  At September 30, 2015, our foreclosed real estate included two parcels of residential real estate.

Deposits. Deposits increased $3.4 million, or 5.1%, to $71.3 million at September 30, 2015 from $67.9 million at December 31, 2014. Our core deposits decreased $2.3 million, or 5.7%, to $38.9 million at September 30, 2015 from $41.2 million at December 31, 2014.  Certificates of deposit increased $5.8 million, or 21.6%, to $32.4 million at September 30, 2015 from $26.6 million at December 31, 2014.  While the Bank is continually seeking growth in deposits, especially core deposits, during the first quarter of 2015, management elected to add certain listing service certificates of deposit totaling $4.5 million with maturities ranging from two to five years and an average cost of 1.40%.  Management intends to focus its efforts to increase core deposits, with a special emphasis on growth in consumer and business demand deposits.

Borrowings.  Borrowings, including Federal Home Loan Bank advances and federal funds purchased, totaled $6.9 million at September 30, 2015 compared to $9.4 million at December 31, 2014.  The decrease in borrowings was attributable to repayment during the 2015 first quarter of $2.5 million of federal funds purchased from another bank.  The aggregate cost of outstanding advances from the Federal Home Loan Bank was 1.88% at September 30, 2015, compared to the Bank’s cost of deposits of 0.84% at that date.

Stock Subscription Proceeds in Escrow. Stock subscription proceeds in escrow totaled $2.4 million at September 30, 2015, which represented funds received and held at the Bank for stock subscription orders received related to the Bank’s conversion from mutual to stock form. As the conversion was not completed as of September 30, 2015, the proceeds were held in escrow. Upon completion of the conversion on October 19, 2015, these funds were transferred to shareholders’ equity on the balance sheet of the Bank’s newly formed holding company New Bancorp, Inc. The conversion resulted in the issuance of 696,600 shares of common stock at an offering price of $10.00 per share.  

Total Equity. Total equity decreased $19,000, or 0.2%, to $10.0 million at September 30, 2015 compared to December 31, 2014. The decrease resulted from the net loss of $19,000 during the nine months ended September 30, 2015.

Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

General. Net loss for the three months ended September 30, 2015 was $120,000, compared to a net loss of $455,000 for the three months ended September 30, 2014. This $355,000 decrease in the net loss was primarily due to a $20,000 increase in net interest income, a $172,000 increase in noninterest income and a $143,000 decrease in noninterest expenses.

Interest Income. Interest income increased $55,000, or 7.4%, to $800,000 for the three months ended September 30, 2015 from $745,000 for the three months ended September 30, 2014. This increase was primarily attributable to a $60,000 increase in interest on loans receivable, partially offset by a $5,000 decrease in interest on investment securities and other interest-earning deposits. The average balance of loans including loans held for sale during the three months ended September 30, 2015 increased $11.8 million, or 19.0%, to $73.9 million from $62.1 million for the three months ended September 30, 2014, while the average yield on loans decreased 42 basis points to 4.28% for the three months ended September 30, 2015 from 4.70% for the three months ended September 30, 2014. The decrease in average yield on loans was due to lower market interest rates period to period, as well as an increase in payoffs of higher interest rate loans as customers refinanced loans at lower interest rates. The average balance of investments and other interest-earning deposits, including certificates of deposit in other banks, decreased $9.2 million to $6.3 million for the three months ended September 30, 2015 from $15.5 million for the three months ended September 30, 2014.

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Interest Expense. Total interest expense increased $35,000, or 22.6%, to $190,000 for the three months ended September 30, 2015 from $155,000 for the three months ended September 30, 2014. Interest expense on deposit accounts increased $20,000, or 14.6%, to $157,000 for the three months ended September 30, 2015 from $137,000 for the three months ended September 30, 2014. The increase was primarily due to an increase of $852,000, or 1.3%, in the average balance of deposits to $68.9 million for the three months ended September 30, 2015 from $68.1 million for the three months ended September 30, 2014, and an increase of 11 basis points in the average cost of interest-bearing deposits to 0.91% for the three months ended September 30, 2015 from 0.80% for the three months ended September 30, 2014.  Interest expense on borrowings increased $15,000 to $33,000 for the three months ended September 30, 2015 from $18,000 for the three months ended September 30, 2014. The average balance of advances increased $6.7 million to $6.9 million for the three months ended September 30, 2015 compared to $215,000 for the three months ended September 30, 2014, while the average cost of these advances decreased to 1.91% for the three months ended September 30, 2015.  As noted above, management elected to increase outstanding advances as a source of lower-cost funding.

Net Interest Income. Net interest income increased $20,000, or 3.4%, to $610,000 for the three months ended September 30, 2015 compared to $590,000 for the three months ended September 30, 2014. The increase was due to a six basis points increase in our interest rate spread to 2.99% for the three months ended September 30, 2015 from 2.93% for the three months ended September 30, 2014 reflecting a shift in average interest-earning assets from interest-earning deposits to higher-yielding loans, offset in part by a $5.0 million decrease in average net interest-earning assets period to period.

Our net interest margin increased to 3.05% for the three months ended September 30, 2015 from 3.04% for the three months ended September 30, 2014.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we did not record a provision for loan losses for either of the three months ended September 30, 2015 and 2014. The allowance for loan losses was $1.2 million, or 1.55% of total loans, at September 30, 2015, compared to $1.0 million, or 1.63% of total loans, at September 30, 2014.  Total nonperforming loans were $1.3 million at September 30, 2015, compared to $1.2 million at September 30, 2014. Classified (substandard, doubtful and loss) loans were $3.0 million at September 30, 2015 and $3.2 million at September 30, 2014, and total loans past due greater than 30 days were $1.2 million and $1.1 million at those respective dates.  We had no charge-offs or recoveries during either of the three months ended September 30, 2015 and 2014.  As a percentage of nonperforming loans, the allowance for loan losses was 91.9% at September 30, 2015 compared to 89.0% at September 30, 2014.

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at September 30, 2015 and 2014. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.

Non-Interest Income. Non-interest income increased $172,000, or 661.5%, to $198,000 for the three months ended September 30, 2015 from $26,000 for the three months ended September 30, 2014. The increase was primarily due to an increase of $59,000 in gains on sales of loans and a decrease in losses on sales of foreclosed real estate.  The gain on sales of loans amounted to $62,000 during the three months ended September 30, 2015, compared to $3,000 in the year earlier period, due primarily to an increase in the volume of loan sales period-to-period.

Non-Interest Expense. Non-interest expense decreased $143,000, or 13.4%, to $928,000 for the three months ended September 30, 2015 compared to $1.1 million for the three months ended September 30, 2014. The decrease was due primarily to a $53,000, or 10.2%, decrease in salaries and employee benefits and a $141,000, or 85.5%, decrease in professional services, which were partially offset by a $34,000, or 43.0%, increase in impairment losses and expenses on foreclosed real estate.  The decrease in salaries and employee benefits was due primarily to a $50,000 decrease in the expense of a non-qualified retirement plan for certain of our former executives, as this plan was terminated during the year ended December 31, 2014, and a $38,000 decrease in expense related to the Bank’s multiple employer defined benefit plan period-to-period, which were partially offset by increases in compensation and health care costs. The decrease in professional services was due primarily to legal costs related to the 2014 non-qualified benefit plan settlement and services related to mutual institution corporate governance and a decrease in audit and regulatory examination expenses period to period due primarily to improvements in the risk profile of the Bank.  The increase in impairment losses and expenses on foreclosed assets resulted primarily from impairment charges recorded in the current quarter as management obtained updated appraisals on the foreclosed assets.

Non-interest expense can be expected to increase because of costs associated with operating as a public company and increased compensation costs related to possible implementation of one or more stock-based benefit plans, if approved by our stockholders.

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Federal Income Taxes. The Bank did not record a federal income tax provision during either of the three month periods ended September 30, 2015 and 2014.  The federal income tax provision was affected by the full impairment valuation allowance recorded on the Bank’s net deferred tax assets in both 2015 and 2014.  Management evaluated the deferred tax asset based upon a projection of future operating results and determined that a full impairment valuation allowance was required at both September 30, 2015 and 2014.  The Bank has a total valuation allowance on its net deferred tax assets of $4.2 million at September 30, 2015. The deferred tax asset will only be recognized in future periods upon the Bank’s ability to realize and maintain profitable results of operations.

Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

General. Net loss for the nine months ended September 30, 2015 was $19,000, compared to a net loss of $827,000 for the nine months ended September 30, 2014. The decrease in the net loss of $808,000 was primarily due to a $145,000 increase in net interest income, a $422,000 increase in noninterest income and a $441,000 decrease in noninterest expenses, partially offset by a nonrecurring $200,000 credit provision for loan losses recognized in the comparable 2014 period.

Interest Income. Interest income increased $236,000, or 10.9%, to $2.4 million for the nine months ended September 30, 2015 from $2.2 million for the nine months ended September 30, 2014. This increase was primarily attributable to a $254,000 increase in interest on loans receivable, which was partially offset by a $18,000 decrease in interest on investment securities and other interest-earning deposits. The average balance of loans including loans held for sale during the nine months ended September 30, 2015 increased $13.1 million, or 21.9%, to $72.9 million from $59.8 million for the nine months ended September 30, 2014, while the average yield on loans decreased 38 basis points to 4.34% for the nine months ended September 30, 2015 from 4.72% for the nine months ended September 30, 2014 reflecting lower market interest rates, as well as an increase in payoffs of higher interest rate loans as customers refinanced loans at lower interest rates. The average balance of investments and other interest-earning deposits, including certificates of deposit in other banks, decreased $14.0 million to $5.1 million for the nine months ended September 30, 2015 from $19.1 million for the nine months ended September 30, 2014.

Interest Expense. Total interest expense increased $91,000, or 20.0%, to $546,000 for the nine months ended September 30, 2015 from $455,000 for the nine months ended September 30, 2014. Interest expense on deposit accounts increased $21,000, or 5.0%, to $444,000 for the nine months ended September 30, 2015 from $423,000 for the nine months ended September 30, 2014. The increase was primarily due to an increase of five basis points in the average cost of interest-bearing deposits to 0.89% for the nine months ended September 30, 2015 from 0.84% for the nine months ended September 30, 2014, partially offset by a decrease of $300,000, or 0.4%, in the average balance of deposits to $66.7 million for the nine months ended September 30, 2015 from $67.0 million for the nine months ended September 30, 2014.  Interest expense on borrowings increased $70,000 to $102,000 for the nine months ended September 30, 2015 from $32,000 for the nine months ended September 30, 2014. The average balance of advances increased $6.6 million to $7.4 million for the nine months ended September 30, 2015 compared to $736,000 for the nine months ended September 30, 2014, while the average cost of these advances decreased to 1.85% for the 2015 nine-month period.  As noted above, management elected to increase outstanding advances as a source of lower-cost funding.

Net Interest Income. Net interest income increased $145,000, or 8.5%, to $1.9 million for the nine months ended September 30, 2015 compared to $1.7 million for the nine months ended September 30, 2014. The increase was due to a 37 basis point increase in the interest rate spread to 3.13% for the nine months ended September 30, 2015 from 2.76% for the nine months ended September 30, 2014 reflecting a shift in our average interest-earning assets from interest-earning deposits to higher-yielding loans, offset in part by a decrease in our average net interest-earning assets of $7.2 million period to period.

Our net interest margin increased to 3.17% for the nine months ended September 30, 2015 from 2.89% for the nine months ended September 30, 2014 further reflecting the shift in our interest-earning assets.

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we did not record a provision for loan losses for the nine months ended September 30, 2015, compared to a $200,000 credit provision recognized in the nine months ended September 30, 2014.  The allowance for loan losses was $1.2 million, or 1.55% of total loans, at September 30, 2015, compared to $1.0 million, or 1.63% of total loans, at September 30, 2014.  Total nonperforming loans were $1.3 million at September 30, 2015, compared to $1.2 million at September 30, 2014. Classified (substandard, doubtful and loss) loans were $3.0 million at September 30, 2015 and $3.2 million at September 30, 2014, and total loans past due greater than 30 days were $1.2 million and $1.1 million at those respective dates.  We had $8,000 of net recoveries during the nine month period ended September 30, 2015 compared to net charge-offs of $26,000 during the nine month period ended September 30, 2014.  As a percentage of nonperforming loans, the allowance for loan losses was 91.9% at September 30, 2015 compared to 89.0% at September 30, 2014.

The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at September 30, 2015 and December 31, 2014. While we believe the estimates and assumptions used in

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our determination of the adequacy of the allowance are reasonable, the actual amount of future provisions may exceed the amount of past provisions, and the increase in future provisions that may be required may adversely impact our financial condition and results of operations.

Non-Interest Income. Non-interest income increased $422,000, or 137.9%, to $728,000 for the nine months ended September 30, 2015 from $306,000 for the nine months ended September 30, 2014. The increase was primarily due to an increase of $316,000 in gains on sales of loans and a $109,000 decrease in losses on sales of foreclosed real estate. The gain on sales of loans amounted to $341,000 in the nine months ended September 30, 2015, compared to $25,000 in the year earlier period, due primarily to an increase in the volume of loan sales period-to-period.

Non-Interest Expense. Non-interest expense decreased $441,000, or 14.5%, to $2.6 million for the nine months ended September 30, 2015 compared to $3.0 million for the nine months ended September 30, 2014. The decrease was due primarily to a $171,000, or 11.1%, decrease in salaries and employee benefits; a $202,000, or 62.0%, decrease in professional services; and a $70,000, or 34.5%, decrease in impairment losses and expenses on foreclosed real estate.  The decrease in salaries and employee benefits was due primarily to a $155,000 decrease in the expense of a non-qualified retirement plan for certain former executives of the Bank, as this plan was terminated during the year ended December 31, 2014, and a $93,000 decrease in expense related to the Bank’s multiple employer defined benefit plan period-to-period, which were partially offset by a $37,000, or 3.3%, increase in compensation.  The decrease in professional services was due primarily to legal costs related to the 2014 non-qualified benefit plan settlement and services related to mutual institution corporate governance, along with decreases in audit expense and supervisory examination expense, due primarily to improvements in the risk profile of the Bank.  The decrease in impairment losses and expenses on foreclosed assets was due primarily to a decline in the volume of foreclosures year to year.

Non-interest expense can be expected to increase because of costs associated with operating as a public company and increased compensation costs related to possible implementation of one or more stock-based benefit plans, if approved by our stockholders.

Federal Income Taxes.  The Bank did not record a federal income tax provision during either of the nine month periods ended September 30, 2015 and 2014.  The federal income tax provision was affected by the full impairment valuation allowance recorded on the Bank’s net deferred tax assets in both the 2015 and 2014 periods.  Management evaluated the deferred tax asset based upon a projection of future operating results and determined that a full impairment valuation allowance was required at both September 30, 2015 and 2014.  The Bank has a total valuation allowance on its net deferred tax assets of $4.2 million at September 30, 2015.  The deferred tax asset will only be recognized in future periods upon the Bank’s ability to realize and maintain profitable results of operations.

Not applicable, as the Registrant is a smaller reporting company.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2015. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2015, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II – Other Information

The Bank is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations.

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Not applicable, as the Registrant is a smaller reporting company.

None.

Not applicable.

None.

 

 

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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.

 

 

 

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