SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

[   ]

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

 

For the transition period from _______________ to _______________

 

Commission File No. 000-55530

 

New Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland		47-4314938
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
45 North Whittaker Street, New Buffalo, Michigan		49117
(Address of Principal Executive Offices)		(Zip Code)

 

(269) 469-2222

(Registrant’s telephone number)

 

N/A

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

 

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

YES [X]     NO [   ]

 

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

YES [X]     NO [   ]

 

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

 

Large accelerated filer [   ]		Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if smaller reporting company) Emerging growth company [ X ]		Smaller reporting company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

YES [   ]     NO [X]

 

As of May 12, 2017, the latest practicable date, 696,600 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

 

 

New Bancorp, Inc.

Form 10-Q

 

Index 

			Page
Part I. Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016		2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (unaudited)		3
	Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2017		4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.	Controls and Procedures		33
Part II. Other Information
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3.	Defaults upon Senior Securities		34
Item 4.	Mine Safety Disclosures		34
Item 5.	Other Information		34
Item 6.	Exhibits		34
	Signature Pages		35

 

 

Part I. – Financial Information

 

Item 1.

Financial Statements

 

New Bancorp, Inc.

Condensed Consolidated Balance Sheets

March 31, 2017 (Unaudited) and December 31, 2016

(In Thousands, except share data)

 

		March 31,				December 31,
		2017				2016
Assets
Cash and due from banks		$	1,510			$	1,419
Interest-earning demand deposits			9,110				8,438
Federal funds sold			4,840				-
Cash and cash equivalents			15,460				9,857
Interest-earning time deposits in banks			992				992
Loans, net of allowance for loan losses of $1,042, and $1,063 at March 31, 2017 and December 31, 2016, respectively			86,695				83,008
Premises and equipment			1,896				1,934
Federal Home Loan Bank stock			468				468
Foreclosed real estate held for sale, net			561				586
Accrued interest receivable			221				203
Bank owned life insurance			5,460				5,418
Mortgage servicing rights			566				483
Prepaid expenses and other assets			2,786				269
Total assets		$	115,105			$	103,218
Liabilities and Shareholders' Equity
Liabilities
Deposits
Demand		$	29,879			$	28,676
Savings and money market accounts			15,984				16,404
Time			43,595				31,761
Total deposits			89,458				76,841
Federal funds purchased			-				1,000
Borrowings			10,027				10,027
Other liabilities			1,060				781
Total liabilities			100,545				88,649
Commitments and Contingencies			-				-
Redeemable common stock held by Employee Stock Ownership Plan (ESOP)			91				73
Shareholders' Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued			-				-
Common stock, $0.01 par value, 4,000,000 shares authorized, 696,600 shares issued and outstanding			7				7
Additional paid-in capital			5,764				5,761
Unearned ESOP shares			(494	)			(501	)
Retained earnings			9,283				9,302
Total shareholders' equity			14,560				14,569
Less maximum cash obligation related to ESOP shares			(91	)			(73	)
Total shareholders' equity less maximum cash obligation related to ESOP shares			14,469				14,496
Total liabilities and shareholders' equity		$	115,105			$	103,218

 

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

 

 

New Bancorp, Inc.

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2017 and 2016 (Unaudited)

(In Thousands, except per share data)

 

		Three Months Ended March 31,
		2017				2016
Interest Income
Loans		$	931			$	825
Interest-bearing deposits			18				12
Total interest income			949				837
Interest Expense
Deposits			166				153
Borrowings			39				33
Total interest expense			205				186
Net Interest Income			744				651
Provision for Loan Losses			-				-
Net Interest Income After Provision for Loan Losses			744				651
Noninterest Income
Service charges and fees			66				62
Gain on sale of loans			214				18
Gain on sale of foreclosed real estate, net			29				-
Income from bank owned life insurance			42				42
Loan servicing fees, net			14				18
Other operating			11				8
Total noninterest income			376				148
Noninterest Expense
Salaries and employee benefits			630				566
Occupancy and equipment			95				117
Data processing fees			114				101
FDIC insurance premiums			8				20
Insurance premiums			10				13
Professional services			121				124
Impairment losses and expenses of foreclosed real estate			9				5
Other			152				110
Total noninterest expense			1,139				1,056
Net Loss		$	(19	)		$	(257	)
Loss per share - basic and diluted		$	(0.03	)			(0.40)

 

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

 

 

New Bancorp, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2017

(In Thousands)

 

																		Maximum Cash
										Shares								Obligation
		Common				Additional				Acquired				Retained				Related to
		Stock				Paid In Capital				by ESOP				Earnings				ESOP Shares				Total
Balance at January 1, 2017		$	7			$	5,761			$	(501	)		$	9,302			$	(73	)		$	14,496
Maximum cash obligation related to ESOP shares			-				-				-				-				(18	)			(18	)
ESOP shares earned			-				3				7				-				-				10
Net loss for the three months ended March 31, 2017			-				-				-				(19	)			-				(19	)
Balance at March 31, 2017		$	7			$	5,764			$	(494	)		$	9,283			$	(91	)		$	14,469

 

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

 

 

New Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2017 and 2016

(In Thousands)

 

 

		Three Months Ended March 31,
		2017				2016
Operating Activities
Net loss		$	(19	)		$	(257	)
Items not requiring (providing) cash
Depreciation and amortization			55				50
Deferred loan origination fees, costs, premiums, and discounts, net			(3	)			1
Gain on sale of loans			(214	)			(18	)
Proceeds from sales of loans originated for sale			1,444				707
Loans originated for sale			(3,597	)			(695	)
Gain on sale of foreclosed real estate			(29	)			-
ESOP shares earned			10				-
Cash surrender value of life insurance			(42	)			(42	)
Changes in
Accrued interest receivable			(18	)			13
Prepaid expenses and other assets			(2,519	)			53
Other liabilities			281				187
Net cash used in operating activities			(4,651	)			(1	)
Investing Activities
Net change in loans			(1,411	)			1,928
Purchase of premises and equipment			(6	)			(37	)
Proceeds from sale of foreclosed assets			54				-
Net cash provided by (used in) investing activities			(1,363	)			1,891
Financing Activities
Net increase in deposits			12,617				2,707
Net change in federal funds purchased			(1,000	)			-
Net cash provided by financing activities			11,617				2,707
Increase in Cash and Cash Equivalents			5,603				4,597
Cash and Cash Equivalents, Beginning of Period			9,857				8,810
Cash and Cash Equivalents, End of Period		$	15,460			$	13,407
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and borrowings		$	200			$	189

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 1:     Basis of Presentation

 

The accompanying condensed consolidated balance sheet of New Bancorp, Inc. (the Company) as of December 31, 2016, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements of the Company as of March 31, 2017 and for the three months ended March 31, 2017 and 2016, were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto of the Company for the year ended December 31, 2016 included in the Company’s Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Form 10-K.

 

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of March 31, 2017 and the results of operations and cash flows for the three months ended March 31, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three months ended March 31, 2017 herein, are not necessarily indicative of the results of operations to be expected for the entire year.

 

 

Principles of Consolidation

 

 

The consolidated financial statements as of and for the periods ended March 31, 2017 and December 31, 2016, include New Bancorp, Inc. and its wholly-owned subsidiary the New Buffalo Savings Bank “the Bank”, together referred to as the “Company.” Intercompany transactions and balances have been eliminated in consolidation. The conversion to stock form, including the formation of New Bancorp, Inc., was completed on October 19, 2015.

 

 

Use of Estimates

 

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

 

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

 

              Reclassifications

 

Certain reclassifications have been made to the December 31, 2016 financial statements to conform to the March 31, 2017 financial statement presentation.  These reclassifications had no effect on our results of operations. 

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 2:     Securities

 

The Company had no investment securities at March 31, 2017 and December 31, 2016. The Company had no sales of investment securities during the three month periods ended March 31, 2017 and 2016.

 

Note 3:     Loans and Allowance for Loan Losses

 

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

 

Loans Receivable

 

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

 

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

 

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

 

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

 

Allowance for Loan Losses

 

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

 

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

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

 

Classes of loans at March 31, 2017 and December 31, 2016 include:

 

		March 31,				December 31,
		2017				2016
		(Unaudited)
		(In thousands)
Real estate loans
Residential		$	43,656			$	43,036
Commercial			34,132				32,175
Construction and land			10,139				9,543
Commercial business			1,193				383
Consumer and other			689				776
Total loans			89,809				85,913
Less:
Net deferred loan fees, premiums and discounts			(105	)			(70	)
Undisbursed loans in process			(1,967	)			(1,772	)
Allowance for loan losses			(1,042	)			(1,063	)
Net loans		$	86,695			$	83,008

 

Residential Real Estate: The residential real estate loans are generally secured by owner-occupied and non owner occupied 1-4 family residences. The Bank’s portfolio of home equity loans totaled $4.6 million and $4.7 million at March 31, 2017 and December 31, 2016, respectively, the majority of which were secured by first liens, or by second liens on properties where the Bank also holds the first lien. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

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

 

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

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

The following tables present by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016 and the recorded investment in loans and impairment method as of March 31, 2017 and December 31, 2016:

 

		For the Three Months Ended March 31, 2017 (Unaudited)
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Allowance for loan losses:
Balance, January 1, 2017		$	656			$	326			$	72			$	4			$	5			$	1,063
Provision (credit) for loan losses			(66	)			39				6				18				3				-
Charge-offs			(12	)			-				-				(9	)			-				(21	)
Recoveries			-				-				-				-				-				-
Balance, March 31, 2017		$	578			$	365			$	78			$	13			$	8			$	1,042

 

						For the Three Months ended March 31, 2016
Allowance for loan losses:
Balance, January 1, 2016		$	648			$	383			$	102			$	19			$	3			$	1,155
Provision (credit) for loan losses			91				(72	)			(11	)			(12	)			4				-
Charge-offs			-				-				-				-				-				-
Recoveries			-				-				-				-				-				-
Balance, March 31 , 2016		$	739			$	311			$	91			$	7			$	7			$	1,155

 

		March 31, 2017 (Unaudited)
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Allowance for loan losses:
Ending balance, individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-
Ending balance, collectively evaluated for impairment		$	578			$	365			$	78			$	13			$	8			$	1,042
Loans:
Ending balance		$	43,656			$	34,132			$	10,139			$	1,193			$	689			$	89,809
Ending balance; individually evaluated for impairment		$	2,757			$	528			$	1,681			$	-			$	-			$	4,966
Ending balance; collectively evaluated for impairment		$	40,899			$	33,604			$	8,458			$	1,193			$	689			$	84,843

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

		December 31, 2016
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Allowance for loan losses:
Ending balance		$	656			$	326			$	72			$	4			$	5			$	1,063
Ending balance, individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-
Ending balance, collectively evaluated for impairment		$	656			$	326			$	72			$	4			$	5			$	1,063
Loans:
Ending balance		$	43,036			$	32,175			$	9,543			$	383			$	776			$	85,913
Ending balance; individually evaluated for impairment		$	2,779			$	533			$	1,709			$	-			$	-			$	5,021
Ending balance; collectively evaluated for impairment		$	40,257			$	31,642			$	7,834			$	383			$	776			$	80,892

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Internal Risk Categories

 

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

 

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

 

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

 

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

 

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

 

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.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of March 31, 2017 and December 31, 2016:

 

		March 31, 2017
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Pass		$	41,496			$	33,604			$	8,823			$	1,193			$	689			$	85,805
Special mention/Watch			290				-				-				-				-				290
Substandard			1,870				528				1,316				-				-				3,714
Doubtful			-				-				-				-				-				-
Total		$	43,656			$	34,132			$	10,139			$	1,193			$	689			$	89,809

 

		December 31, 2016
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Pass		$	40,724			$	31,677			$	8,520			$	348			$	766			$	82,035
Special mention/Watch			415				-				-				-				10				425
Substandard			1,897				498				1,023				35				-				3,453
Doubtful			-				-				-				-				-				-
Total		$	43,036			$	32,175			$	9,543			$	383			$	776			$	85,913

 

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of March 31, 2017 and December 31, 2016:

 

		March 31, 2017 (Unaudited)
																										Total Loans >
		30-59 Days				60-89 Days				Greater Than				Total								Total Loans				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Receivable				Accruing
		(In thousands)
Real estate
Residential		$	272			$	-			$	314			$	586			$	43,070			$	43,656			$	-
Commercial			-				-				-				-				34,132				34,132				-
Construction and land			-				-				-				-				10,139				10,139				-
Commercial business			-				-				-				-				1,193				1,193				-
Consumer			-				-				-				-				689				689				-
Total		$	272			$	-			$	314			$	586			$	89,223			$	89,809			$	-

 

		December 31, 2016
																										Total Loans >
		30-59 Days				60-89 Days				Greater Than				Total								Total Loans				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Receivable				Accruing
		(In thousands)
Real estate
Residential		$	194			$	-			$	327			$	521			$	42,515			$	43,036			$	-
Commercial			-				-				4				4				32,171				32,175				-
Construction and land			-				-				-				-				9,543				9,543				-
Commercial business			-				-				-				-				383				383				-
Consumer			-				-				-				-				776				776
Total		$	194			$	-			$	331			$	525			$	85,388			$	85,913			$	-

 

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

The following table presents impaired loans as of March 31, 2017 and for the three month periods ended March 31, 2017 and 2016:

 

		As of												For the Three Months Ended
		March 31, 2017												March 31, 2017								March 31, 2016
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Balance of Impaired Loans				Interest Income Recognized				Average Balance of Impaired Loans				Interest Income Recognized
		(Unaudited)
		(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential		$	2,757			$	2,874			$	-			$	2,510			$	37			$	1,451			$	15
Commercial			528				528				-				528				7				236				4
Construction and land			1,681				1,681				-				1,713				25				1,739				21
Commercial business											-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Loans with a specific valuation allowance:
Real estate
Residential			-				-				-				-				-				270				1
Commercial			-				-				-				-				-				-				-
Construction and land			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Totals		$	4,966			$	5,083			$	-			$	4,751			$	69			$	3,696			$	41

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

 

The following table presents impaired loans as of December 31, 2016:

 

		As of December 31, 2016
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Balance of Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential		$	2,779			$	2,936			$	-			$	2,420			$	140
Commercial			533				560				-				230				28
Construction and land			1,709				1,709				-				1,760				95
Commercial business			-				-				-				-				-
Consumer			-				-				-				-				-
Loans with a specific valuation allowance:
Real estate
Residential			-				-				-				-				-
Commercial			-				-				-				-				-
Construction and land			-				-				-				-				-
Commercial business			-				-				-				-				-
Consumer			-				-				-				-				-
Totals		$	5,021			$	5,205			$	-			$	4,410			$	263

 

 

The following table presents the Company’s nonaccrual loans at March 31, 2017 and December 31, 2016. The table excludes performing troubled debt restructurings.

 

		March 31, 2017				December 31, 2016
		(In thousands)
Real estate loans
Residential		$	617			$	614
Commercial			-				4
Construction and land			-				-
Commercial business			-				-
Consumer and other			-				-
Total nonaccrual		$	617			$	618

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

At March 31, 2017 (unaudited) and December 31, 2016, the Company had certain loans that were modified in troubled debt restructurings (TDRs) and impaired. The modification of terms of such loans generally included one or a combination of the following: an extension of the maturity date or a reduction of the stated interest rate.

 

During the three months ended March 31, 2017 and 2016, there were no new loan modifications classified as TDRs.

 

The Company had no TDRs modified in the twelve months ended March 31, 2017 and 2016 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.

 

Foreclosed real estate held for sale consisted of residential real estate at March 31, 2017 and December 31, 2016. There were $323,000 of residential real estate loans in the process of foreclosure at March 31, 2017 and December 31, 2016.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Note 4:     Regulatory Matters

 

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

 

At March 31, 2017 and December 31, 2016, quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the table below), of total capital, Tier 1 capital and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 leverage capital to average total assets.

 

Basel III was effective for the Company on January 1, 2015. Basel III requires the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital to risk weighted assets, as defined in the regulation. Under the new Basel III rules, in order to avoid limitations on capital distributions, including dividends, the Company must hold a capital conservation buffer above the adequately capitalized common equity Tier 1 capital to risk-weighted assets ratio. The capital conservation buffer is being phased in from zero percent to 2.50 percent by 2019. Under Basel III, the Company and Bank elected to opt-out of including accumulated other comprehensive income in regulatory capital.

 

Management believes, as of March 31, 2017 (unaudited) and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of March 31, 2017 (unaudited) and December 31, 2016, 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.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

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

 

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of March 31, 2017
Total Capital
(to Risk-Weighted Assets)		$	13,989				17.8	%		$	6,273				8.0	%		$	7,841				10.0	%
Tier 1 Capital
(to Risk-Weighted Assets)		$	13,008				16.6	%		$	4,705				6.0	%		$	6,273				8.0	%
Common Equity Tier I Capital
(to Risk-Weighted Assets)		$	13,008				16.6	%		$	3,529				4.5	%		$	5,097				6.5	%
Tier I Leverage Capital
(to Average Total Assets)		$	13,008				12.1	%		$	4,299				4.0	%		$	5,374				5.0	%
As of December 31, 2016
Total Capital
(to Risk-Weighted Assets)		$	13,943				17.6	%		$	6,327				8.0	%		$	7,908				10.0	%
Tier I Capital
(to Risk-Weighted Assets)		$	12,954				16.4	%		$	4,745				6.0	%		$	6,327				8.0	%
Common Equity Tier I Capital
(to Risk-Weighted Assets)		$	12,954				16.4	%		$	3,559				4.5	%		$	5,140				6.5	%
Tier I Capital
(to Total Assets)		$	12,954				12.9	%		$	4,024				4.0	%		$	5,030				5.0	%

 

Note 5:     Disclosures about Fair Value of Assets and Liabilities

 

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

 

Level 1

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3

Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated 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 March 31, 2017 and December 31, 2016:

 

 

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
March 31, 2017
Impaired loans, collateral dependent		$	220			$	-			$	-			$	220
December 31, 2016
Impaired loans, collateral dependent		$	232			$	-			$	-			$	232

 

 

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.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Unobservable (Level 3) Inputs

 

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

 

		Fair Value				Valuation Technique			Unobservable Inputs			Range
		(In thousands)
March 31, 2017
Impaired loans (collateral dependent)		$	220			Marketable comparable properties			Marketability discount			17%	-	24%
December 31, 2016
Impaired loans (collateral dependent)		$	232			Marketable comparable properties			Marketability discount			10%	-	15%

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Fair Value of Financial Instruments

 

The following table presents the estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2017 and December 31, 2016.

 

										Fair Value Measurement Using
		Carrying Value				Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
March 31, 2017
Financial assets
Cash and due from banks		$	1,510			$	1,510			$	1,510			$	-			$	-
Interest-earning demand deposits			9,110				4,270				4,270				-				-
Federal funds sold			4,840				4,840				4,840				-				-
Interest-earning time deposits in banks			992				992				-				992				-
Loans, net			86,695				86,511				-				-				86,511
Federal Home Loan Bank stock			468				468				-				468				-
Accrued interest receivable			221				221				-				221				-
Servicing rights			566				566				-				-				566
Financial liabilities
Deposits			89,458				89,720				45,863				43,857				-
Advances from the Federal Home Loan Bank			10,027				10,120				-				10,120				-
Accrued interest payable			12				12				-				12				-
December 31, 2016
Financial assets
Cash and due from banks		$	1,419			$	1,419			$	1,419			$	-			$	-
Interest-earning demand deposits			8,438				8,438				8,438				-				-
Interest-earning time deposits in banks			992				992				-				992				-
Loans, net			83,008				83,538				-				-				83,538
Federal Home Loan Bank stock			468				468				-				468				-
Accrued interest receivable			203				203				-				203				-
Servicing rights			483				483				-				-				483
Financial liabilities
Deposits			76,841				77,104				45,080				32,024				-
Federal funds purchased			1,000				1,000				1,000				-				-
Advances from the Federal Home Loan Bank			10,027				10,127				-				10,127				-
Accrued interest payable			7				7				-				7				-

 

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

 

Cash and Due from Banks, Interest-earning Demand Deposits and Federal Funds Sold

 

The carrying amount approximates fair value. 

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Interest-earning Time Deposits in Banks

 

The carrying amount approximates fair value. 

 

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.

 

Servicing Rights

 

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

 

Deposits

 

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

 

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

 

 

 

Federal Funds Purchased

 

The carrying amount approximates fair value. 

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Federal Home Loan Bank Advances

 

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

 

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

 

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

 

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

 

 

 

Note 6:     Recent Accounting Pronouncements

 

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

 

FASB ASU 2014-09, Revenue from Contracts with Customers

 

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March, 2016 the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients” which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.

 

The amendments are effective, as to the Company,  for annual reporting periods beginning after December 15, 2017 and for interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting the guidance.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

 

The amendments in this update are effective, as to the Company, for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in this update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. An entity should apply the amendments to this update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements. Adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's results of operations or financial position

 

FASB ASU 2016-02, Leases

 

In February 2016 the FASB issued ASU 2016-02, “Leases”. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

●

A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

●

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers”.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

 

The amendments in ASU 2016-02 are effective, as to the Company, for years beginning after December 15, 2019, and for interim periods for years beginning after January 1, 2020.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and    operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the impact of adopting this guidance on the Company’s financial statements.

 

FASB ASU 2016-13, Financial Instruments – Credit Losses

 

In June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”.  The amendments in this Update replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. ASU No. 2016-13 replaces the incurred loss impairment methodology with a new methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to inform credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held-to-maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required. ASU No. 2016-13 is effective, as to the Company, for fiscal years, beginning after December 15, 2020, and interim periods within those fiscal years, beginning after December 15, 2021.  Management expects that the implementation of ASU No. 2016-13 may increase the balance of the allowance for loan losses and is continuing to evaluate the potential impact on the Company's results of operations and financial position.

 

 

 

Note 7:     Loss Per Share

 

Basic loss per share (“LPS”) is calculated by dividing net loss applicable to common stock by the weighted-average number of shares of common stock outstanding during the period. Unallocated common shares held by the Company’s Employee Stock Ownership Plan (the “ESOP”) are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for basic and diluted LPS calculations until they are committed to be released.

 

Loss per share for the three months ended March 31, 2017 and 2016 was $0.03 and $0.40, respectively, calculated using 696,600 average shares issued, less 49,458 and 52,353 unallocated average shares held by the ESOP for each respective period. The Company had no dilutive or potentially dilutive securities at March 31, 2017 and 2016.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

Note 8:     Employee Stock Ownership Plan

 

As part of the Company’s stock conversion, shares were purchased by the ESOP with a loan from New Bancorp. All employees of the Bank meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $10,000 and $5,000 for the three month periods ended March 31, 2017 and 2016, respectively.  The stock price at the formation date was $10.00. The aggregate fair value of the 49,458 unallocated shares was $717,000 based on the $14.50 closing price of our common stock on March 31, 2017.

 

 

 

Note 9:     Change in Corporate Form

 

On October 19, 2015, the Bank converted into a federal stock savings bank and established a stock holding company, New Bancorp, Inc., as parent of the Bank.

 

The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to New Bancorp, Inc. The Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock pursuant to an independent

valuation appraisal of the Bank and the Company. The stock was priced at $10.00 per share. In addition, the Bank’s board of directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering. The Conversion was completed on October 19, 2015 and resulted in the issuance of 696,600 common shares by the Company. The cost of the Conversion and issuing the capital stock totaled $1.2 million and was deducted from the proceeds of the offering.

 

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

eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. The conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General 

 

Management’s discussion and analysis of the financial condition at March 31, 2017 and results of operations for the three months ended March 31, 2017 and 2016 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:

 

●

statements of our goals, intentions and expectations;

 

●

statements regarding our business plans, prospects, growth and operating strategies;

 

●

statements regarding the quality of our loan and investment portfolios; and

 

●

estimates of our risks and future costs and benefits.

 

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

 

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

 

●

our ability to manage our operations in the event of adverse economic conditions nationally and in our market area;

 

●

adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);

 

●

significant increases in our loan losses, including as a result of our inability to resolve classified and non-performing assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

 

●

credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

 

●

the use of estimates in determining fair value of certain of our assets, which may prove to be incorrect and result in significant declines in valuations;

 

●

competition among depository and other financial institutions;

 

●

our success in increasing our residential real estate and commercial real estate lending, and selling certain of our residential real estate loans;

 

 

●

our ability to attract and maintain deposits and our success in introducing new financial products;

 

●

our ability to improve our asset quality even as we increase our commercial real estate lending;

 

●

changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

 

●

fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

 

●

changes in consumer spending, borrowing and savings habits;

 

●

declines in the yield on our assets resulting from the current low interest rate environment;

 

●

risks related to a high concentration of loans secured by real estate located in our market area;

 

●

the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

 

●

changes in the level of government support of housing finance;

 

●

our ability to enter new markets successfully and capitalize on growth opportunities;

 

●

changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, particularly the new capital regulations, and the resources we have available to address such changes;

 

●

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Securities and Exchange Commission;

 

●

changes in our compensation and benefit plans, and our ability to retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

 

●

loan delinquencies and changes in the underlying cash flows of our borrowers;

 

●

our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

 

●

the failure or security breaches of computer systems on which we depend;

 

●

the ability of key third-party service providers to perform their obligations to us;

 

●

changes in the financial condition or future prospects of issuers of securities that we own; and

 

 

●

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

 

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

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in New Bancorp, Inc.’s Annual Report on Form 10-K, as filed with the Securities and Exchange on March 30, 2017.

 

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

 

Total Assets. Total assets were $115.1 million at March 31, 2017, an increase of $11.9 million, or 11.5%, compared to $103.2 million at December 31, 2016. The increase was due primarily to an increase of $5.6 million in cash and cash equivalents and $3.7 million in loans.

 

Loans, net. Loans, net increased $3.7 million, or 4.4%, to $86.7 million at March 31, 2017 from $83.0 million at December 31, 2016. During the three months ended March 31, 2017, we originated $8.4 million of loans, consisting primarily of $5.6 million of commercial real estate loans, $1.4 million of construction and land loans, $877,000 of one-to four- family residential, and $438,000 of commercial business, and sold $3.6 million of loans. During the three months ended March 31, 2017, one- to four-family residential real estate loans increased $620,000, or 1.4%, to $43.7 million at March 31, 2017, from December 31, 2016, while commercial real estate loans increased $2.0 million, or 6.1%, to $34.1 million at March 31, 2017.

 

Increases in loan balances reflect our strategy to grow and diversify our loan portfolio, with an emphasis on increasing both commercial and residential loans. During 2016 the Company added three loan officers, with specializations in Small Business Administration (SBA) loans, commercial real estate loans and residential loans. Commercial loan originations during the three months ended March 31, 2017 included commercial real estate loans and commercial loans guaranteed by the SBA’s 7(a) program. These SBA loans are subsequently sold, with servicing retained. We intend to continue to increase commercial lending, including SBA loans, in future years. The Bank also engages in a program to sell certain fixed-rate, 30-year term mortgage loans in the secondary market. The Bank primarily sells loans on a servicing retained basis, in transactions with the Federal Home Loan Bank of Indianapolis, through its mortgage purchase program, and the Federal Home Loan Mortgage Corporation (Freddie Mac). Management intends to continue loan sales activity in future periods.

 

Bank Owned Life Insurance. At March 31, 2017, our investment in bank owned life insurance was $5.5 million, an increase of $42,000, from $5.4 million at December 31, 2016. 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 decreased $25,000, or 4.3%, to $561,000 at March 31, 2017 from $586,000 at December 31, 2016, as we had a sale of a foreclosure property with a carrying value of $25,000. At March 31, 2017, our foreclosed real estate was comprised of two parcels of residential real estate.

 

 

Deposits. Deposits increased $12.6 million, or 16.4%, to $89.4 million at March 31, 2017 from $76.8 million at December 31, 2016. Our core deposits increased $783,000, or 1.7%, to $45.9 million at March 31, 2017 from $45.1 million at December 31, 2016. Certificates of deposit increased $11.8 million, or 37.3%, to $43.6 million at March 31, 2017 from $31.8 million at December 31, 2016. During 2016, the Company implemented a strategy designed to promote growth in core deposits. Specifically the Company hired a director of retail banking and began to offer demand and savings accounts using the Kasasa program. Management intends to focus its efforts to increase core deposits, with a special emphasis on growth in consumer and business demand deposits.

 

Borrowings. Federal Home Loan Bank advances totaled $10.0 million at both March 31, 2017 and December 31, 2016. The average cost of outstanding advances from the Federal Home Loan Bank was 1.72% at March 31, 2017, compared to the Bank’s cost of deposits of 0.85% at that date.

 

Total Equity. Total equity before maximum cash obligation related to ESOP shares, decreased $9,000, or 0.1%, to $14.6 million at March 31, 2017 compared to December 31, 2016. The decrease resulted primarily from the net loss of $19,000 during the three months ended March 31, 2017.

 

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

 

General. Net loss for the three months ended March 31, 2017 was $19,000, compared to a net loss of $257,000 for the three months ended March 31, 2016. This $238,000 decrease in the net loss was primarily due to a $228,000 increase in noninterest income, and a $93,000 increase in net interest income, which were partially offset by an increase in non-interest expense of $83,000.

 

Interest Income. Interest income increased $112,000, or 13.4%, to $949,000 for the three months ended March 31, 2017 from $837,000 for the three months ended March 31, 2016. This increase was primarily attributable to a $106,000 increase in interest on loans receivable, and a $6,000 increase in interest on other interest-earning deposits. The average balance of loans during the three months ended March 31, 2017 increased $9.2 million, or 11.9%, to $86.0 million from $76.8 million for the three months ended March 31, 2016, while the average yield on loans increased four basis points to 4.33%. The average balance of other interest-earning deposits, including certificates of deposit in other banks and federal funds sold decreased $1.4 million to $1.6 million for the three months ended March 31, 2017 from $3.0 million for the three months ended March 31, 2016.

 

Interest Expense. Total interest expense increased $19,000, or 10.2%, to $205,000 for the three months ended March 31, 2017 from $186,000 for the three months ended March 31, 2016. Interest expense on deposits increased $13,000, or 8.5%, to $166,000 for the three months ended March 31, 2017 from $153,000 for the three months ended March 31, 2016. The increase was primarily due to an increase in the average deposits of $6.5 million, while the average cost of deposits remained unchanged period to period at 0.88%. Interest expense on borrowings increased $6,000, or 18.2%, to $39,000 for the three months ended March 31, 2017 from $33,000 for the three months ended March 31, 2016, The increase was due primarily to a $3.1 million increase in the average balance outstanding, which was partially offset by a decrease in the average cost of these advances to 1.6% for the three months ended March 31, 2017 compared to 1.9% for the three months ended March 31, 2016.

 

Net Interest Income. Net interest income increased $93,000, or 14.3%, to $744,000 for the three months ended March 31, 2017 compared to $651,000 for the three months ended March 31, 2016. The increase was due to a 17 basis points increase in our interest rate spread to 3.38% for the three months ended March 31, 2017 from 3.21% for the three months ended March 31, 2016. Our net interest margin increased to 3.39% for the three months ended March 31, 2017 from 3.26% for the three months ended March 31, 2016.

 

 

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 March 31, 2017 and 2016. The allowance for loan losses was $1.0 million, or 1.18% of total loans, at March 31, 2017, compared to $1.2 million, or 1.52% of total loans, at March 31, 2016. Total nonperforming loans were $617,000 at March 31, 2017, compared to $1.3 million at March 31, 2016. Classified (substandard, doubtful and loss) loans were $3.7 million at March 31, 2017 and $1.9 million at March 31, 2016, and total loans past due greater than 30 days were $586,000 and $1.1 million at those respective dates. We had net charge-offs of $21,000 during the three months ended March 31, 2017 and no charge offs or recoveries for the three months ended March 31, 2016. As a percentage of nonperforming loans, the allowance for loan losses was 168.9% at March 31, 2017 compared to 91.7% at March 31, 2016.

 

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 March 31, 2017 and 2016. 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 $228,000, or 154.0%, to $376,000 for the three months ended March 31, 2017 from $148,000 for the three months ended March 31, 2016. The increase was primarily due to an increase of $196,000 in gains on sales of loans. The gain on sales of loans amounted to $214,000 during the three months ended March 31, 2017, compared to $18,000 in the year earlier period, due primarily to an increase in volume of SBA loan sales. The Company did not start its SBA lending program until the second quarter of 2016.

 

Non-Interest Expense. Non-interest expense increased $83,000, or 7.9%, to $1.1 million for the three months ended March 31, 2017 compared to $1.0 million for the three months ended March 31, 2016. The increase was due primarily to a $64,000, or 11.3%, increase in salaries and employee benefits, and an increase in other expense of $42,000 or 38.2%, for the three months ended March 31, 2017, partially offset by a decrease of $22,000, or 18.9%, in occupancy and equipment expenses. The increase in salaries and employee benefits was due primarily to the addition of new officers, and increased costs related to employee benefits, including healthcare and the ESOP plan. In accordance with our strategic plans to grow our core deposit base and to expand our emphasis on Small Business Administration lending and our commercial lending in the Detroit metropolitan area to our east, during 2016 we added a director of retail banking, and two loan officers to our loan origination staff. The increase in other expenses was primarily due to the Kasasa program, which we adopted during second quarter of 2016 to develop new checking and savings products in accordance with our strategy to grow core deposits, and increases due to public filing expenses.

 

Federal Income Taxes. The Company did not record a federal income tax provision during either of the three month periods ended March 31, 2017 and 2016. The federal income tax provision was affected by the full impairment valuation allowance recorded on the Company’s net deferred tax assets in both 2017 and 2016. 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 March 31, 2017 and 2016. The Bank has a total valuation allowance on its net deferred tax assets of $4.5 million at March 31, 2017. The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize and maintain profitable results of operations.

 

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits, principal and interest payments on loans, and proceeds from the sale of loans and advances from the FHLB-Indianapolis. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

 

      Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash used in operating activities was $4.7 million and $1,000 for the three months ended March 31, 2017 and 2016, respectively. Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable was $(1.4 million) and $1.9 million for the three months ended March 31, 2017 and 2016, respectively. Net cash provided by financing activities, which is comprised of net change in deposits, was $11.6 million and $2.7 million for the three months ended March 31, 2017 and 2016, respectively.

 

At March 31, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $13.0 million, or 12.1% of adjusted average assets, which is above the required level of $4.3 million or 4.0%; total risk-based capital of $14.0 million, or 17.8% of risk-weighted assets, which is above the required level of $6.3 million, or 8.0%; and common equity Tier 1 capital of $13.0 million, or 16.6% of risk-weighted assets, which is above the required level of $3.5 million, or 4.5% of risk-weighted assets. Accordingly, New Buffalo Savings Bank was categorized as well capitalized at March 31, 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

At March 31, 2017, we had no outstanding commitments to originate loans and lines of credit of $10.0 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2017 totaled $14.5 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB-Indianapolis advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.

Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Principal Financial Officer and Controller, 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 March 31, 2017. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Principal Financial Officer and Controller, concluded that the Registrant’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2017, 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

 

Item 1.

Legal Proceedings

 

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

 

Item 1A.

Risk Factors

 

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

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

 

Item 3.

Defaults Upon Senior Securities

 

None.

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None.

 

Item 6.

Exhibits

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2

Certification of Principal Financial Officer and Controller pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32

Certification of Chief Executive Officer and Principal Financial Officer and Controller pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		NEW BANCORP, INC.
Date:  May 12, 2017		/s/ Richard C. Sauerman
		Richard C. Sauerman
		President and Chief Executive Officer
Date:  May 12, 2017		/s/ Shawna L. Zawada
		Shawna L. Zawada
		Principal Financial Officer/Controller

 

 

35