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 September 30, 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. 000-204842

 

New Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

	Maryland		47-4314938
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification Number)

 

	45 North Whittaker Street,		49117
	New Buffalo, Michigan
	(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 [   ]		Smaller reporting company [X]
(Do not check if smaller reporting company)
Emerging growth 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 November 11, 2017, the latest practicable date, 719,531 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 September 30, 2017 (unaudited) and December 31, 2016	2
	Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	3
	Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2017	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38
Part II. Other Information
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
	Signature Pages	40

 

 

Part I. – Financial Information

 

Item 1.

Financial Statements

 

New Bancorp, Inc.

Condensed Consolidated Balance Sheets

September 30, 2017 (Unaudited) and December 31, 2016

(In thousands, except share data)

 

		September 30,				December 31,
		2017				2016
Assets
Cash and due from banks		$	1,318			$	1,419
Interest-earning demand deposits			2,440				8,438
Federal funds sold			18,241				-
Cash and cash equivalents			21,999				9,857
Interest-earning time deposits in banks			744				992
Loans, net of allowance for loan losses of $1,127, and $1,063 at September 30, 2017 and December 31, 2016, respectively			93,949				83,008
Premises and equipment			1,880				1,934
Federal Home Loan Bank stock			468				468
Foreclosed real estate held for sale, net			-				586
Accrued interest receivable			219				203
Bank owned life insurance			5,546				5,418
Servicing rights			952				483
Prepaid expenses and other assets			247				269
Total assets		$	126,004			$	103,218
Liabilities and Shareholders' Equity
Liabilities
Deposits
Demand		$	42,553			$	28,676
Savings and money market accounts			16,424				16,404
Time			40,627				31,761
Total deposits			99,604				76,841
Federal funds purchased			-				1,000
Borrowings			10,027				10,027
Other liabilities			983				781
Total liabilities			110,614				88,649
Commitments and Contingencies			-				-
Redeemable common stock held by Employee Stock Ownership Plan (ESOP)			116				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, 719,531 and 696,600 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively			7				7
Additional paid-in capital			5,789				5,761
Unearned ESOP shares			(481	)			(501	)
Retained earnings			10,075				9,302
Total shareholders' equity			15,390				14,569
Less maximum cash obligation related to ESOP shares			(116	)			(73	)
Total shareholders' equity less maximum cash obligation related to ESOP shares			15,274				14,496
Total liabilities and shareholders' equity		$	126,004			$	103,218

 

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

 

 

New Bancorp, Inc.

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

(In thousands, except per share data)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Interest Income
Loans		$	1,093			$	855			$	3,075			$	2,488
Interest-bearing deposits			67				19				123				46
Total interest income			1,160				874				3,198				2,534
Interest Expense
Deposits			233				153				610				456
Borrowings			39				20				117				86
Total interest expense			272				173				727				542
Net Interest Income			888				701				2,471				1,992
Provision for Loan Losses			39				-				70				-
Net Interest Income After Provision for Loan Losses			849				701				2,401				1,992
Noninterest Income
Service charges and fees			97				72				270				213
Gain on sale of loans			494				135				1,433				470
Gain (loss) on sale of foreclosed real estate, net			(15	)			7				15				21
Income from bank owned life insurance			43				43				128				128
Loan servicing fees, net			3				(4	)			30				24
Other operating			(8	)			6				11				23
			-
Total noninterest income			614				259				1,887				879
Noninterest Expense
Salaries and employee benefits			645				642				1,953				1,818
Occupancy and equipment			99				119				298				351
Data processing fees			134				112				378				314
Franchise taxes			10				10				40				28
FDIC insurance premiums			12				18				30				57
Insurance premiums			9				10				29				34
Professional services			101				59				352				311
Impairment losses and expenses of foreclosed real estate			2				-				15				5
Other			158				177				420				413
Total noninterest expense			1,170				1,147				3,515				3,331
Net Income (Loss)		$	293			$	(187	)		$	773			$	(460	)
Earnings (loss) per share - basic		$	0.45			$	(0.29	)		$	1.19			$	(0.71	)
Earnings (loss) per share - diluted		$	0.45			$	(0.29	)		$	1.19			$	(0.71	)
Weighted average shares basic			648,230				644,247				647,617				644,247
Weighted average shares diluted			650,110				644,247				648,243				644,247

 

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 Nine Months Ended September 30, 2017

(In thousands)

 

																		Maximum Cash
						Additional												Obligation
		Common				Paid-In				Unearned				Retained				Related to
		Stock				Capital				ESOP Shares				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			-				-				-				-				(43	)			(43	)
ESOP shares earned			-				3				20				-				-				23
Compensation expense related to restricted shares			-				16				-				-				-				16
Compensation expense related to stock options			-				9				-				-				-				9
Net income for the nine months ended September 30, 2017			-				-				-				773				-				773
Balance at September 30, 2017		$	7			$	5,789			$	(481	)		$	10,075			$	(116	)		$	15,274

 

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

 

 

New Bancorp, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2017 and 2016

(In thousands)

 

		Nine Months Ended September 30,
		2017				2016
Operating Activities
Net income (loss)		$	773			$	(460	)
Items not requiring (providing) cash
Depreciation and amortization			177				188
Provision for loan losses			70				-
Deferred loan origination fees, costs, premiums, and discounts, net			(21	)			(3	)
Gain on sale of loans			(1,433	)			(470	)
Proceeds from sales of loans originated for sale			20,337				10,906
Loans originated for sale			(19,418	)			(10,607	)
Gain on sale of foreclosed real estate			(15	)			(21	)
ESOP shares earned			23				-
Compensation expense related to stock benefit plans			25				-
Increase in cash surrender value of life insurance			(128	)			(128	)
Changes in
Accrued interest receivable			(16	)			8
Prepaid expenses and other assets			22				(57	)
Other liabilities			202				120
Net cash provided by (used in) operating activities			598				(524	)
Investing Activities
Net change in loans			(10,990	)			(2,924	)
Net change in interest-earning time deposits			248				-
Purchase of premises and equipment			(78	)			(87	)
Proceeds from sale of foreclosed assets			601				266
Net cash used in investing activities			(10,219	)			(2,745	)
Financing Activities
Net increase in deposits			22,763				5,815
Net change in federal funds purchased			(1,000	)			-
Net cash provided by financing activities			21,763				5,815
Increase in Cash and Cash Equivalents			12,142				2,546
Cash and Cash Equivalents, Beginning of Period			9,857				8,810
Cash and Cash Equivalents, End of Period		$	21,999			$	11,356
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest on deposits and borrowings		$	716			$	547

 

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 September 30, 2017 and for the three and nine months ended September 30, 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 September 30, 2017 and the results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. All interim amounts have not been audited and the results of operations for the three and nine months ended September 30, 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 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 September 30, 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 September 30, 2017 and December 31, 2016. The Company had no sales of investment securities during the nine month periods ended September 30, 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 September 30, 2017 and December 31, 2016 include:

 

		September 30,				December 31,
		2017				2016
		(Unaudited)
		(In thousands)
Real estate loans
Residential		$	42,639			$	43,036
Commercial			41,196				32,175
Construction and land			9,890				9,543
Commercial business			2,027				383
Consumer and other			618				776
Total loans			96,370				85,913
Less:
Net deferred loan fees, premiums and discounts			(322	)			(70	)
Undisbursed loans in process			(972	)			(1,772	)
Allowance for loan losses			(1,127	)			(1,063	)
Net loans		$	93,949			$	83,008

 

 

Residential Real Estate: The residential real estate loans are generally secured by owner-occupied 1-4 family residences. The Bank’s portfolio of home equity loans totaled $4.5 million and $4.7 million at September 30, 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 and nine months ended September 30, 2017 and 2016:

 

		For the Three Months Ended September 30, 2017
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Allowance for loan losses:
Balance, July 1, 2017		$	545			$	442			$	76			$	15			$	8			$	1,086
Provision for loan losses			-				39				-				-				-				39
Charge-offs			-				-				-				-				-				-
Recoveries			-				2				-				-				-				2
Balance, September 30, 2017		$	545			$	483			$	76			$	15			$	8			$	1,127

 

		For the Nine Months ended September 30, 2017
Allowance for loan losses:
Balance, January 1, 2017		$	656			$	326			$	72			$	4			$	5			$	1,063
Provision (credit) for loan losses			(99	)			151				4				11				3				70
Charge-offs			(12	)			(9	)			-				-				-				(21	)
Recoveries			-				15				-				-				-				15
Balance, September 30 , 2017		$	545			$	483			$	76			$	15			$	8			$	1,127

 

		For the Three Months Ended September 30, 2016
Allowance for loan losses:		(In thousands)
Balance, July 1, 2016		$	766			$	331			$	88			$	6			$	5			$	1,196
Provision (credit) for loan losses			(28	)			40				(6	)			(2	)			(4	)			-
Charge-offs			(120	)			-				-				-				-				(120	)
Recoveries			-				-				-				-				-				-
Balance, September 30, 2016		$	618			$	371			$	82			$	4			$	1			$	1,076

 

		For the Nine Months Ended September 30, 2016
Allowance for loan losses:		(In thousands)
Balance, January 1, 2016		$	648			$	383			$	102			$	19			$	3			$	1,155
Provision (credit) for loan losses			90				(12	)			(61	)			(15	)			(2	)			-
Charge-offs			(120	)			-				-				-				-				(120	)
Recoveries			-				-				41				-				-				41
Balance, September 30. 2016		$	618			$	371			$	82			$	4			$	1			$	1,076

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2017 and December 31, 2016:

 

		At September 30, 2017
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Allowance for loan losses:
Ending balance, individually evaluated for impairment		$	-			$	-			$	-			$	-			$	-			$	-
Ending balance, collectively evaluated for impairment		$	545			$	483			$	76			$	15			$	8			$	1,127
Loans:
Ending balance		$	42,639			$	41,196			$	9,890			$	2,027			$	618			$	96,370
Ending balance; individually evaluated for impairment		$	1,114			$	34			$	1,614			$	-			$	-			$	2,762
Ending balance; collectively evaluated for impairment		$	41,525			$	41,162			$	8,204			$	2,027			$	618			$	93,608

 

 

		December 31, 2016
		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		$	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 September 30, 2017 and December 31, 2016:

 

		September 30, 2017
		Real Estate
										Construction				Commercial
		Residential				Commercial				and Land				Business				Consumer				Total
		(In thousands)
Pass		$	40,705			$	40,674			$	8,625			$	2,027			$	618			$	92,649
Special mention/Watch			320				-				-				-				-				320
Substandard			1,614				522				1,265				-				-				3,401
Doubtful			-				-				-				-				-				-
Total		$	42,639			$	41,196			$	9,890			$	2,027			$	618			$	96,370

 

		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 September 30, 2017 and December 31, 2016:

 

		September 30, 2017 (Unaudited)
										Greater																Total Loans >
		30-59 Days				60-89 Days				Than				Total								Total Loans				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Receivable				Accruing
		(In thousands)
Real estate
Residential		$	132			$	96			$	-			$	228			$	42,411			$	42,639			$	-
Commercial			-				-				-				-				41,196				41,196				-
Construction and land			-				-				-				-				9,890				9,890				-
Commercial business			-				-				-				-				2,027				2,027				-
Consumer			-				-				-				-				618				618				-
Total		$	132			$	96			$	-			$	228			$	96,142			$	96,370			$	-

 

		December 31, 2016
										Greater																Total Loans >
		30-59 Days				60-89 Days				Than				Total								Total Loans				90 Days &
		Past Due				Past Due				90 Days				Past Due				Current				Receivable				Accruing
		(In thousands)
Real estate
Residential		$	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, 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 tables present impaired loans as of September 30, 2017 and for the three and nine month periods ended September 30, 2017 and 2016:

 

		As of												For the Three Months Ended
		September 30, 2017												September 30, 2017								September 30, 2016
														Average								Average
						Unpaid								Balance of				Interest				Balance of				Interest
		Recorded Balance				Principal Balance				Specific Allowance				Impaired Loans				Income Recognized				Impaired Loans				Income Recognized
		(Unaudited)
		(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential		$	1,114			$	1,177			$	-			$	1,122			$	16			$	1,655			$	11
Commercial			34				34				-				34				1				237				2
Construction and land			1,614				1,681				-				1,630				23				1,539				22
Commercial business											-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Loans with a specific valuation allowance:
Real estate
Residential			-				-				-				-				-				-				-
Commercial			-				-				-				-				-				-				-
Construction and land			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Totals		$	2,762			$	2,892			$	-			$	2,786			$	40			$	3,431			$	35

 

																						For the nine Months Ended
		As of and for the nine months ended September 30, 2017																				September 30, 2016
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Balance of Impaired Loans				Interest Income Recognized				Average Balance of Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential		$	1,047			$	1,177			$	-			$	2,134			$	53			$	1,631			$	39
Commercial			34				34				-				149				1				236				10
Construction and land			1,681				1,681				-				1,672				70				1,639				64
Commercial business			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Loans with a specific valuation allowance:
Real estate
Residential			-				-				-				-				-				-				-
Commercial			-				-				-				-				-				-				-
Construction and land			-				-				-				-				-				-				-
Commercial business			-				-				-				-				-				-				-
Consumer			-				-				-				-				-				-				-
Totals		$	2,762			$	2,892			$	-			$	3,955			$	124			$	3,506			$	113

 

 

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
		(In thousands)
Loans without a specific valuation allowance:
Real estate
Residential		$	2,779			$	2,936			$	-
Commercial			533				560				-
Construction and land			1,709				1,709				-
Commercial business			-				-				-
Consumer			-				-				-
Loans with a specific valuation allowance:
Real estate
Residential			-				-				-
Commercial			-				-				-
Construction and land			-				-				-
Commercial business			-				-				-
Consumer			-				-				-
Totals		$	5,021			$	5,205			$	-

 

The following table presents the Company’s nonaccrual loans at September 30, 2017 and December 31, 2016. The table excludes performing troubled debt restructurings.

 

		September 30,				December 31,
		2017				2016
		(In thousands)
Real estate loans
Residential		$	444			$	614
Commercial			-				4
Construction and land			-				-
Commercial business			-				-
Consumer and other			-				-
Total nonaccrual		$	444			$	618

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

At September 30, 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 and nine months ended September 30, 2017 and 2016, there were no new loan modifications classified as TDRs.

 

The Company had no TDRs modified in the twelve months ended September 30, 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.

 

As of September 30, 2017 there was no foreclosed real estate held for sale and at December 31, 2016 foreclosed real estate consisted of residential property. There was no residential real estate loans in the process of foreclosure at September 30, 2017 and $323,000 of residential real estate loans in the process of foreclosure at 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 September 30, 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 September 30, 2017 (unaudited) and December 31, 2016, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 30, 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 September 30, 2017
Total Capital (to Risk-Weighted Assets)		$	15,036				17.3	%		$	6,936				8.0	%		$	8,670				10.0	%
Tier 1 Capital (to Risk-Weighted Assets)		$	13,952				16.1	%		$	5,202				6.0	%		$	6,936				8.0	%
Common Equity Tier I Capital (to Risk-Weighted Assets)		$	13,952				16.1	%		$	3,902				4.5	%		$	5,636				6.5	%
Tier I Leverage Capital (to Average Total Assets)		$	13,952				11.0	%		$	5,082				4.0	%		$	6,352				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 Leverage Capital (to Average 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 Company had no assets measured at fair value on a non-recurring basis at September 30, 2017.

 

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 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)
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

 

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)

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 September 30, 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)
September 30, 2017
Financial assets
Cash and due from banks		$	1,318			$	1,318			$	1,318			$	-			$	-
Interest-earning demand deposits			2,440				2,440				2,440				-				-
Federal funds sold			18,241				18,241				18,241				-				-
Interest-earning time deposits in banks			744				744				-				744				-
Loans, net			93,949				93,534				-				-				93,534
Federal Home Loan Bank stock			468				468				-				468				-
Accrued interest receivable			219				220				220				-				-
Servicing rights			952				952				-				-				952
Financial liabilities
Deposits			99,604				99,756				58,977				40,779				-
Advances from the Federal Home Loan Bank			10,027				10,092				-				10,092				-
Accrued interest payable			15				15				15				-				-
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				10,120				-				10,120				-
Accrued interest payable			7				7				7				-				-

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

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

 

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

 

The carrying amount approximates fair value. 

 

Interest-earning Time Deposits in Banks

 

The carrying amount approximates fair value. 

 

Loans 

 

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

 

Federal Home Loan Bank Stock

 

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

 

Accrued Interest Receivable and Payable

 

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

 

Servicing Rights

 

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

 

Deposits

 

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

 

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

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

Federal 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.

 

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 amended guidance is effective, as to the Company, for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019, 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. 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 2016-09, Share-Based Payments.

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows.  Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.  The amendments are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Adoption of these amendments did not have a material impact on the financial statements of the Company.

 

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, 2019, and interim periods within those fiscal years. Management expects that the implementation of ASU No. 2016-13 may increase the balance of the allowance for loan losses and is continuing to evaluate the potential impact on the Company's results of operations and financial position.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 7:     Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (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 earnings (loss) per share calculations until they are committed to be released.

 

Calculations of earnings per share for the three and nine months ended September 30, 2017 is as follows:

 

Three Months Ended September 30, 2017

Weighted-

Net

Average

Per Share

Income

Shares

Amount

(In thousands)

Net income

$

293

Basic earnings per share

648,230

$

0.45

Effect of dilutive securities

Restricted stock awards

1,880

Diluted earnings per share

650,110

$

0.45

 

Nine Months Ended September 30, 2017

Weighted-

Net

Average

Per Share

Income

Shares

Amount

(In thousands)

Net income

$

773

Basic earnings per share

647,617

$

1.19

Effect of dilutive securities

Restricted stock awards

627

Diluted earnings per share

648,243

$

1.19

 

Basic earnings per share for the three and nine months ended September 30, 2017 was $0.45 and $1.19, respectively, calculated for the three and nine months ended using 719,531 and 704,412 average shares issued respectively, less 48,754 unallocated average shares held by the ESOP and the average of any unearned restricted stock awards for each respective period. Loss per share for the three and nine months ended September 30, 2016 was $0.29 and $0.71, respectively, calculated using 696,600 average shares issued, less 52,353 unallocated average shares held by the ESOP for each respective period. The Company had no dilutive or potentially dilutive securities at September 30, 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 $23,000 for the three and nine month periods ended September 30, 2017, respectively and $7,000 and $20,000 for the three and nine month periods ended September 30, 2016, respectively.

 

The stock price at the formation date was $10.00. The aggregate fair value of the 47,681 unallocated shares was $763,000 based on the $16.00 closing price of our common stock on September 30, 2017.

 

Note 9:     Equity Incentive Plan

 

In June 2017, the Company’s stockholders authorized the adoption of the New Bancorp, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). No more than 97,524 shares of the Company’s common stock may be issued under the 2017 Plan, of which a maximum of 69,660 may be issued pursuant to the exercise of stock options and 27,864 may be issued pursuant to restricted stock awards, restricted stock units and unrestricted share awards. Stock options awarded to employees may be incentive stock options or non-qualified stock options. The shares that may be issued may be authorized but unissued shares or treasury shares. The 2017 Plan permits the grant of incentive awards in the form of options, stock appreciation rights, restricted share and share unit awards, and performance share awards. The 2017 Plan contains annual and lifetime limits on certain types of awards to individual participants.

 

Awards may vest or become exercisable only upon the achievement of performance measures or based solely on the passage of time after award.  Stock options and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the 2017 Plan).

 

On June 30, 2017, the Company made awards of restricted shares and granted stock options for 22,931 and 60,080 shares, respectively, to members of the Board of Directors and to certain members of management. The awards vest over a five year period and the stock options have a ten year period to expiration.  Each option has an exercise price of $14.09 as determined on the grant date and expires 10 years from the grant date.

 

Stock Options

 

The table below represents the stock option activity for the period shown: 

 

										Remaining
						Weighted-average				contractual
		Options				exercise price				life (years)
Options outstanding at January 1, 2017			-			$	-				-
Granted			60,080				14.09				10.0
Exercised			-				-				-
Forfeited			-				-				-
Expired			-				-				-
Options outstanding at September 30, 2017			60,080			$	14.09				9.8

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

As of September 30, 2017, the Company had $175,000 of unrecognized compensation expense related to stock options.  The cost of stock options will be amortized over the five-year vesting period.  The aggregate grant date fair value of the stock options granted in 2017 was $2.87 per share.  The Company recognized $9,000 of compensation expense related to the stock options granted for both the three and nine months ended September 30, 2017.

 

The fair value of the Company's stock options granted in 2017 was determined using the Black-Scholes option pricing formula.   The following assumptions were used in the formula:

 

Expected volatility			13.87	%
Risk-free interest rate			2.18	%
Expected dividend yield			-
Expected life (in years)			7
Exercise price for the stock options		$	14.09

 

The expected volatility was based on the historical volatility of share price for the Company. The risk-free interest rate was based on the U.S. Treasury yield curve and expected life of the options at the time of grant. The dividend yield was 0.00% as the Company does not currently anticipate paying a dividend. The expected life was based on the average of the five year vesting period and the ten year contractual term of the stock option plan. The exercise price for the stock options was based on the closing price of the Company's stock on the date of grant.

 

Restricted Shares

 

Restricted shares are accounted for as fixed grants using the fair value of the Company's stock at the time of the grant.  Unvested restricted shares may not be disposed of or transferred during the vesting period.

 

The table below presents the restricted stock award activity for the period shown:

 

						Weighted-average
		Restricted				grant date
		stock awards				fair value
Non-vested at January 1, 2017			-			$	-
Granted			22,931				14.09
Vested			-				-
Forfeited			-				-
Nonvested at September 30, 2017			22,931			$	14.09

 

As of September 30, 2017, the Company had $307,000 of unrecognized compensation expense related to restricted shares.  The cost of the restricted shares will be amortized over the five-year vesting period. The Company recognized $16,000 expense related to the restricted shares during the three and nine months ended September 30, 2017.

 

 

New Bancorp, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 10:     Change in Corporate Form

 

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

 

The Bank converted to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to New Bancorp, Inc. The Bank became the wholly owned subsidiary of the Company, and the Company issued and sold shares of its capital stock pursuant to an independent valuation appraisal of the Bank and the Company. The stock was priced at $10.00 per share. In addition, the Bank’s board of directors adopted an employee stock ownership plan (ESOP) which subscribed for 8% of the common stock sold in the offering. The Conversion was completed on October 19, 2015 and resulted in the issuance of 696,600 common shares by the Company. The cost of the Conversion and issuing the capital stock totaled $1.2 million and was deducted from the proceeds of the offering.

 

In accordance with OCC regulations, at the time of the Conversion, the Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

 

The conversion was accounted for as a change in corporate form with the historic basis of the Bank’s assets, liabilities and equity unchanged as a result.

 

 

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 September 30, 2017 and results of operations for the three- and nine- months ended September 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

●

statements of our goals, intentions and expectations;

 

●

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

 

●

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

 

●

estimates of our risks and future costs and benefits.

 

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

 

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

 

●

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 September 30, 2017 and December 31, 2016

 

Total Assets. Total assets were $126.0 million at September 30, 2017, an increase of $22.8 million, or 22.1%, compared to $103.2 million at December 31, 2016. The increase was due primarily to increases of $12.1 million in cash and cash equivalents and $10.9 million in loans.

 

Cash and Cash Equivalents. Cash and cash equivalents increased $12.1 million, or 123.2%, to $22.0 million at September 30, 2017 from $9.9 million at December 31, 2016. The increase was due primarily to proceeds from growth in deposits in excess of loan funding requirements during the year, and was being maintained in liquid assets in anticipation of loan funding needs in the short term.

 

Loans, net. Loans, net increased $10.9 million, or 13.2%, to $93.9 million at September 30, 2017 from $83.0 million at December 31, 2016. During the nine months ended September 30, 2017, we originated $37.4 million of loans, consisting primarily of $30.3 million of commercial real estate loans, $2.7 million construction and land loans, and $3.7 million of one-to four- family residential loans, and sold $19.4 million of loans. Of the $19.4 million of loans sold, $17.4 million were Small Business Administration (“SBA”) loans, representing the 75% guaranteed portion we sold on the secondary market.

 

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 SBA loans, commercial real estate loans and residential loans. Commercial loan originations during the nine months ended September 30, 2017 included commercial real estate loans and commercial loans guaranteed by the SBA’s 7(a) program. We originate the SBA loans and subsequently sell 75%, with servicing retained, and we retain the 25% remainder. 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, and moving forward intends to sell such loans with servicing released. Management intends to continue loan sales activity in future periods.

 

Bank Owned Life Insurance. At September 30, 2017, our investment in bank owned life insurance was $5.5 million, an increase of $128,000, 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. At September 30, 2017, the Company did not have foreclosed real estate. Foreclosed real estate decreased $586,000 compared to December 31, 2016, as we sold the three parcels of foreclosed property during the period ended September 30, 2017.

 

Deposits. Deposits increased $22.7 million, or 29.6%, to $99.6 million at September 30, 2017 from $76.8 million at December 31, 2016. Our core deposits increased $13.9 million, or 48.5%, to $58.9 million at September 30, 2017 from $45.1 million at December 31, 2016. Certificates of deposit increased $8.9 million, or 27.9%, to $40.6 million at September 30, 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 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 September 30, 2017 and December 31, 2016. The aggregate cost of outstanding advances from the Federal Home Loan Bank was 1.76% at September 30, 2017, compared to the Bank’s cost of deposits of 1.10% at that date.

 

Total Equity. Total equity increased $821,000, or 5.6%, to $15.3 million at September 30, 2017 compared to December 31, 2016. The increase resulted primarily from net income of $773,000 for the nine months ended September 30, 2017, as well as increases related to stock-based compensation totaling $48,000.

 

Comparison of Operating Results for the Three Months Ended September 30, 2017 and 2016

 

General. Net income for the three months ended September 30, 2017 was $293,000, compared to a net loss of $(187,000) for the three months ended September 30, 2016. This $480,000 increase in net income was primarily due to a $355,000 increase in noninterest income, and a $187,000 increase in net interest income, which were partially offset by an increase in the provision for loan losses of $39,000 and an increase in noninterest expenses of $23,000.

 

Interest Income. Interest income increased $286,000, or 32.7%, to $1.2 million for the three months ended September 30, 2017 from $874,000 for the three months ended September 30, 2016. This increase was primarily attributable to a $238,000 increase in interest on loans receivable, and a $48,000 increase in interest on other interest-earning deposits. The average balance of loans during the three months ended September 30, 2017 increased $14.2 million, or 17.8%, to $93.6 million from $79.5 million for the three months ended September 30, 2016, while the average yield on loans increased 37 basis points to 4.67%. The average balance of other interest-earning deposits, including certificates of deposit in other banks and federal funds sold increased $14.0 million to $22.2 million for the three months ended September 30, 2017 from $8.1 million for the three months ended September 30, 2016. The average yield increased by 30 basis points to 1.23% for the three months ended September 30, 2017 from 0.93% for the three months ended September 30, 2016.

 

Interest Expense. Total interest expense increased $99,000, or 57.2%, to $272,000 for the three months ended September 30, 2017 from $173,000 for the three months ended September 30, 2016. Interest expense on deposits increased $80,000, or 52.3%, to $233,000 for the three months ended September 30, 2017 from $153,000 for the three months ended September 30, 2016. The increase was primarily due to an increase in the average balance of deposits of $12.3 million, while the average cost of deposits increased period to period to 1.10% from 0.85%. Interest expense on borrowings increased $19,000, or 95.0%, to $39,000 for the three months ended September 30, 2017 from $20,000 for the three months ended September 30, 2016. The increase was due primarily to a $3.1 million increase in the average balance outstanding, which increased the average cost of these advances to 1.76% for the three months ended September 30, 2017 compared to 1.15% for the three months ended September 30, 2016.

 

Net Interest Income. Net interest income increased $187,000, or 26.7%, to $888,000 for the three months ended September 30, 2017 compared to $701,000 for the three months ended September 30, 2016. The increase was due to a $12.9 million increase in our net interest earning assets to $21.3 million for the three months ended September 30, 2017 from $8.5 million for the three months ended September 30, 2016. Our net interest margin decreased to 3.05% for the three months ended September 30, 2017 from 3.20% for the three months ended September 30, 2016.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we recorded a $39,000 provision for loan losses for the three months ended September 30, 2017, compared to no provision recorded for the three months ended September 30, 2016. The allowance for loan losses was $1.1 million, or 1.17% of total loans, at September 30, 2017, compared to $1.1 million, or 1.33% of total loans, at September 30, 2016. Total nonperforming loans were $445,000 at September 30, 2017, compared to $885,000 at September 30, 2016. Classified (substandard, doubtful and loss) loans were $3.4 million at September 30, 2017 and $2.0 million at September 30, 2016, and total loans past due greater than 30 days were $228,000 and $736,000 at those respective dates. We had net recoveries of $2,000 during the three months ended September 30, 2017 compared to net charge-offs of $120,000 for the three months ended September 30, 2016. As a percentage of nonperforming loans, the allowance for loan losses was 253.3% at September 30, 2017 compared to 121.6% at September 30, 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 September 30, 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 $355,000, or 137.1%, to $614,000 for the three months ended September 30, 2017 from $259,000 for the three months ended September 30, 2016. The increase was primarily due to an increase of $359,000 in gains on sales of loans. The gain on sales of loans amounted to $494,000 during the three months ended September 30, 2017, compared to $135,000 in the year earlier period, due primarily to an increase in volume of SBA loan sales. The Company started its SBA lending program in the second quarter of 2016. Gains in non-interest income were offset with other operating income one time losses on a sale of foreclosed real estate of ($15,000) and dissolution of a title company the Company had an interest in of ($15,000) during the period ending September 30, 2017.

 

Non interest Expense. Non interest expense increased $23,000, or 2.0%, to $1.2 million for the three months ended September 30, 2017 compared to $1.1 million for the three months ended September 30, 2016. The increase was due primarily to a $42,000, or 71.2%, increase in professional services for the three months ended September 30, 2017. The increase in professional services was due primarily to the timing of audits completed in comparison to the previous three month period ending September 30, 2016. Data processing expense increased $22,000 or 19.6% which was offset with an increase in service charge fee income of $25,000 compared to September 30, 2016 included in non-interest income.

 

Federal Income Taxes. The Company did not record a federal income tax provision during either of the three month periods ended September 30, 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 the 2017 and 2016 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, 2017 and 2016. The Company has a total valuation allowance on its net deferred tax assets of $4.2 million at September 30, 2017. The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize, maintain, and project profitable results of operations.

 

 

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016

 

General. Net income for the nine months ended September 30, 2017 was $773,000, compared to a net loss of $(460,000) for the nine months ended September 30, 2016, an increase of $1.2 million. The increase was primarily due to a $1.0 million increase in noninterest income and a $479,000 increase in net interest income, which were partially offset by a $184,000 increase in noninterest expense and a $70,000 increase in the provision for loan losses.

 

Interest Income. Interest income increased $664,000, or 26.2%, to $3.2 million for the nine months ended September 30, 2017 from $2.5 million for the nine months ended September 30, 2016. This increase was attributable to a $587,000 increase in interest on loans receivable and a $77,000 increase in interest on other interest earning deposits. The average balance of loans during the nine months ended September 30, 2017, increased $12.8 million, or 16.5%, to $90.4 million from $77.6 million for the nine months ended September 30, 2016, while the average yield on loans increased 26 basis points to 4.54% for the nine months ended September 30, 2017 from 4.28% for the nine months ended September 30, 2016 reflecting rising market interest rates. The average balance of other interest-earning assets, including certificates of deposit in other banks and federal funds sold, increased $7.7 million to $15.8 million for the nine months ended September 30, 2017 from $8.1 million for the nine months ended September 30, 2016. The average yield on other interest-earning assets increased 30 basis points to 1.05% for the nine months ended September 30, 2017 from 0.75% for the nine months ended September 30, 2016.

 

Interest Expense. Total interest expense increased $185,000, or 34.1%, to $727,000 for the nine months ended September 30, 2017 from $542,000 for the nine months ended September 30, 2016. Interest expense on deposits increased $154,000, or 33.8%, to $610,000 for the nine months ended September 30, 2016 from $456,000 for the nine months ended September 30, 2016. The increase was primarily due to an increase of 18 basis points in the average cost of interest-bearing deposits to 1.06% for the nine months ended September 30, 2017 from 0.88% for the nine months ended September 30, 2016. Interest expense on borrowings increased to $117,000 for the nine months ended September 30, 2017 from $86,000 for the nine months ended September 30, 2016 due to the addition of two Federal Home Loan Bank advances at the end of 2016.

 

Net Interest Income. Net interest income increased $479,000, or 24.0%, to $2.5 million for the nine months ended September 30, 2017 compared to $2.0 million for the nine months ended September 30, 2016. The increase was due to an increase in our average net interest-earning assets of $9.2 million period to period, as the net interest margin remained unchanged at 3.10% for both periods.

 

Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies – Allowance for Loan Losses,” we recorded a $70,000 provision for loan losses for the nine months ended September 30, 2017, compared to no provision for the nine months ended September 30, 2016. The allowance for loan losses was $1.1 million, or 1.17% of total loans, at September 30, 2017, compared to $1.1 million, or 1.33% of total loans, at September 30, 2016. Total nonperforming loans were $445,000 at September 30, 2017, compared to $889,000 at September 30, 2016. Classified (substandard, doubtful and loss) loans were $3.4 million at September 30, 2017 and $2.0 million at September 30, 2016, and total loans past due greater than 30 days were $228,000 and $736,000 at those respective dates. We had net charge offs of $6,000 and $79,000 for the nine months ending September 30, 2017 and 2016, respectively. As a percentage of nonperforming loans, the allowance for loan losses was 253.3% at September 30, 2017 compared to 121.0% at September 30, 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 September 30, 2017 and December 31, 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 $1.0 million, or 114.7%, to $1.9 million for the nine months ended September 30, 2017 from $879,000 for the nine months ended September 30, 2016. The increase was primarily due to an increase of $963,000 in gains on sales of loans to $1.4 million in the nine months ended September 30, 2017, compared to $470,000 in the year earlier period. During the nine months ended September 30, 2017, the Company originated $23.2 million of SBA loans and sold $17.4 million of these loans. These sales resulted in gains on sale of $1.4 million. Gains in non interest income  were offset with  other operating one time losses on a sale of foreclosed real estate of ($15,000) and dissolution of a title company the Company had an interest in of ($15,000) during the period ending September 30, 2017.

 

Non interest Expense. Non interest expense increased $184,000, or 5.5%, to $3.5 million for the nine months ended September 30, 2017 compared to $3.3 million for the nine months ended September 30, 2016. The increase was due primarily to a $135,000, or 7.4%, increase in salaries and employee benefits and a $64,000, or 20.4%, increase in data processing. The increase in salaries and employee benefits was due primarily to the addition of new commercial loan officers, a new director of retail banking and increased costs related to employee benefits, including the ESOP and the new equity incentive plan approved by stockholders. In accordance with our strategic plans to expand our emphasis on SBA lending and our commercial loan emphasis in the Detroit metropolitan area to our east, we added two loan officers to our loan origination staff with support staff. The increase in data processing was due primarily to increased costs related to our overall growth in loans and deposits.

 

Federal Income Taxes. We did not record a federal income tax provision during either of the nine month periods ended September 30, 2017 and 2016. The federal income tax provision was affected by the full impairment valuation allowance recorded on our net deferred tax assets in both the 2017 and 2016 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, 2017 and 2016. We had a total valuation allowance on its net deferred tax assets of $4.2 million at September 30, 2017. The deferred tax asset will only be recognized in future periods upon the Company’s ability to realize, maintain, and project profitable results of operations.

 

Liquidity and Capital Resources

 

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

 

 Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $598,000 and $(524,000) for the nine months ended September 30, 2017 and 2016, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable was $11.0 million and $2.7 million for the nine months ended September 30, 2017 and 2016, respectively. Net cash provided by financing activities, which is primarily comprised of net change in deposits, was $21.8 million and $5.8 million for the nine months ended September 30, 2017 and 2016, respectively.

 

At September 30, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $14.0 million, or 11.0% of adjusted average assets, which is above the required level of $5.1 million or 4.0%; total risk-based capital of $15.0 million, or 17.3% of risk-weighted assets, which is above the required level of $6.9 million, or 8.0%; and common equity Tier 1 capital of $14.0 million, or 16.1% of risk-weighted assets, which is above the required level of $3.9 million, or 4.5% of risk-weighted assets. Accordingly, the Bank was categorized as well capitalized at September 30, 2017. Management is not aware of any conditions or events since the most recent notification that would change our category.

 

 

At September 30, 2017, we had no outstanding commitments to originate loans, $972,000 in undisbursed construction loans, and commitments available under lines of credit of $8.8 million. We anticipate that we will have sufficient funds available to meet our current loan commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2017 totaled $13.0 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 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, 2017. 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, 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 Company 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 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 Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

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Certification of Chief Executive Officer and Chief Financial Officer 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:  November 14, 2017		/s/ Richard C. Sauerman
		Richard C. Sauerman
		President and Chief Executive Officer
Date:  November 14, 2017		/s/ Shawna L. Zawada
		Shawna L. Zawada
		Chief Financial Officer

 

40