NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 NATURE OF OPERATIONS:
New Peoples
Bankshares, Inc. (“New Peoples”) is a financial holding company whose principal activity is the ownership and management
of a community bank, New Peoples Bank, Inc. (the “Bank”). The Bank is organized and incorporated under the laws of
the Commonwealth of Virginia. As a state chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial
Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services
to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia,
and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such
as checking and savings accounts.
NOTE 2
ACCOUNTING PRINCIPLES:
These consolidated
financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion
of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Company’s financial position at March 31, 2018 and December 31, 2017, and the
results of operations for the three-month periods ended March 31, 2018 and 2017. The notes included herein should be read in conjunction
with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017. The results of operations for interim periods are not necessarily indicative of the results of operations
that may be expected for a full year or any future period.
The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of
the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant
changes in the economic environment and market conditions.
NOTE 3
EARNINGS PER SHARE:
Basic earnings
per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per
share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued.
There were no potential common shares at March 31, 2018. For the three-months ended March 31, 2017, potential common shares consisted
of 880,978 outstanding common stock warrants; however, the warrants were anti-dilutive and were not included in the calculation.
Basic and diluted net income per common share calculations follows:
|
|
|
|
|
(Amounts in Thousands, Except
Share and Per Share Data)
|
|
For the three months
ended March 31,
|
|
|
2018
|
|
2017
|
Net income
|
|
$
|
80
|
|
|
$
|
115
|
|
Weighted average shares outstanding
|
|
|
23,922,086
|
|
|
|
23,354,890
|
|
Dilutive shares for stock warrants
|
|
|
—
|
|
|
|
—
|
|
Weighted average dilutive shares outstanding
|
|
|
23,922,086
|
|
|
|
23,354,890
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Diluted income per share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
NOTE 4
CAPITAL:
The Bank is
subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total
capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 1250%. Tier 1
capital consists of common stockholders’ equity, excluding the unrealized gain or loss on securities available-for-sale,
minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The Bank is also required
to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.
The Company
meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding
Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank’s
actual capital amounts and ratios are presented in the following table as of March 31, 2018 and December 31, 2017, respectively.
These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.
|
|
Actual
|
Minimum
Capital Requirement
|
Minimum
to Be Well Capitalized Under Prompt Corrective Action Provisions
|
(Dollars
are in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
March
31, 2018:
|
Total
Capital to Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
$
|
68,976
|
15.21%
|
$ 36,273
|
8.0%
|
|
$ 45,341
|
10.0%
|
Tier
1 Capital to Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
|
63,331
|
13.97%
|
27,205
|
6.0%
|
|
36,273
|
8.0%
|
Tier
1 Capital to Average Assets:
|
New
Peoples Bank, Inc.
|
|
63,331
|
9.56%
|
26,505
|
4.0%
|
|
33,131
|
5.0%
|
Common
Equity Tier 1 Capital
to
Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
|
63,331
|
13.97%
|
20,403
|
4.5%
|
|
29,472
|
6.5%
|
|
December 31, 2017:
|
Total
Capital to Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
$
|
68,787
|
15.30%
|
$ 35,970
|
8.0%
|
|
$ 44,962
|
10.0%
|
Tier
1 Capital to Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
|
63,160
|
14.05%
|
26,977
|
6.0%
|
|
35,970
|
8.0%
|
Tier
1 Capital to Average Assets:
|
New
Peoples Bank, Inc.
|
|
63,160
|
9.56%
|
26,422
|
4.0%
|
|
33,028
|
5.0%
|
Common
Equity Tier 1 Capital
to
Risk Weighted Assets:
|
New
Peoples Bank, Inc.
|
|
63,160
|
14.05%
|
20,233
|
4.5%
|
|
29,225
|
6.5%
|
As of March
31, 2018, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and Common Equity Tier
1 ratios as set forth in the above tables. There are no conditions or events since the notification that management believes have
changed the Bank’s category.
Under Basel
III Capital requirements, a capital conservation buffer of 0.625% became effective beginning on January 1, 2016. The capital conservation
buffer will be gradually increased through January 1, 2019 to 2.5%. Banks will be required to maintain levels that meet the required
minimum plus the capital conservation buffer in order to make distributions, such as dividends, or discretionary bonus payments.
NOTE 5
INVESTMENT SECURITIES:
The amortized cost and estimated
fair value of securities (all available-for-sale (“AFS”)) are as follows:
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Approximate
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(Dollars
are in thousands)
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
March
31, 2018
|
U.S.
Government Agencies
|
$
|
22,912
|
$
|
55
|
$
|
(354)
|
$
|
22,613
|
Taxable
municipals
|
4,457
|
-
|
(165)
|
4,292
|
Corporate
bonds
|
5,433
|
103
|
(130)
|
5,406
|
Mortgage
backed securities
|
36,023
|
1
|
(1,302)
|
34,722
|
Total
Securities AFS
|
$
|
68,825
|
$
|
159
|
$
|
(1,951)
|
$
|
67,033
|
|
December
31, 2017
|
U.S.
Government Agencies
|
$
|
23,986
|
$
|
79
|
$
|
(221)
|
$
|
23,844
|
Taxable
municipals
|
4,466
|
9
|
(78)
|
4,397
|
Corporate
bonds
|
5,437
|
168
|
(26)
|
5,579
|
Mortgage
backed securities
|
37,950
|
3
|
(685)
|
37,268
|
Total
Securities AFS
|
$
|
71,839
|
$
|
259
|
$
|
(1,010)
|
$
|
71,088
|
The following
table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by
the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 and December
31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
|
(Dollars are in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
March
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
$
|
7,439
|
$
|
(128)
|
$
|
6,800
|
$
|
(226)
|
$
|
14,239
|
$
|
(354)
|
|
Taxable
municipals
|
|
3,545
|
|
(111)
|
|
746
|
|
(54)
|
|
4,291
|
|
(165)
|
|
Corporate
bonds
|
|
2,402
|
|
(130)
|
|
-
|
|
-
|
|
2,402
|
|
(130)
|
|
Mtg.
backed securities
|
|
14,603
|
|
(436)
|
|
20,009
|
|
(866)
|
|
34,612
|
|
(1,302)
|
|
Total
Securities AFS
|
$
|
27,989
|
$
|
(805)
|
$
|
27,555
|
$
|
(1,146)
|
$
|
55,544
|
$
|
(1,951)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies
|
$
|
7,840
|
$
|
(69)
|
$
|
7,189
|
$
|
(152)
|
$
|
15,029
|
$
|
(221)
|
|
Taxable
municipals
|
|
2,403
|
|
(44)
|
|
767
|
|
(34)
|
|
3,170
|
|
(78)
|
|
Corporate
bonds
|
|
1,507
|
|
(26)
|
|
-
|
|
-
|
|
1,507
|
|
(26)
|
|
Mtg.
backed securities
|
|
14,720
|
|
(145)
|
|
21,500
|
|
(540)
|
|
36,220
|
|
(685)
|
|
Total
Securities AFS
|
$
|
26,470
|
$
|
(284)
|
$
|
29,456
|
$
|
(726)
|
$
|
55,926
|
$
|
(1,010)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31,
2018, there were thirteen U.S. Government Agency securities, two taxable municipal securities, and fifty-nine mortgage backed
securities that had been in a loss position for greater than twelve months. Management believes that all unrealized losses have
resulted from temporary changes in the interest rates and current market conditions and not as a result of credit deterioration.
Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced
in the table above before recovery of their amortized cost.
There were
no sales of investment securities during the three months ended March 31, 2018 or 2017.
The amortized
cost and fair value of investment securities at March 31, 2018, by contractual maturity, are shown in the following schedule.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
Weighted
|
(Dollars
are in thousands)
|
Amortized
|
|
Fair
|
|
Average
|
Securities
Available-for-Sale
|
Cost
|
|
Value
|
|
Yield
|
Due
in one year or less
|
$
|
4
|
$
|
4
|
|
1.63%
|
Due
after one year through five years
|
3,494
|
3,407
|
1.92%
|
Due
after five years through ten years
|
|
16,042
|
|
15,802
|
|
3.20%
|
Due
after ten years
|
|
49,285
|
|
47,820
|
|
2.31%
|
Total
|
$
|
68,825
|
$
|
67,033
|
|
2.49%
|
Investment
securities with a carrying value of $10.3 million and $11.0 million at March 31, 2018 and December 31, 2017, respectively, were
pledged as collateral to secure public deposits and for other purposes required by law.
The Bank,
as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. The Bank also owns
stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are
recorded at a cost of $2.6 million as of March 31, 2018 and December 31, 2017.
NOTE 6
LOANS:
Loans receivable
outstanding are summarized as follows:
|
|
|
|
|
(Dollars are in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
132,772
|
|
|
$
|
127,688
|
|
Construction and land development
|
|
|
23,358
|
|
|
|
29,763
|
|
Residential 1-4 family
|
|
|
249,966
|
|
|
|
249,159
|
|
Multifamily
|
|
|
14,143
|
|
|
|
15,481
|
|
Farmland
|
|
|
24,803
|
|
|
|
22,998
|
|
Total real estate loans
|
|
|
445,042
|
|
|
|
445,089
|
|
Commercial
|
|
|
44,760
|
|
|
|
41,345
|
|
Agriculture
|
|
|
3,957
|
|
|
|
3,494
|
|
Consumer installment loans
|
|
|
21,952
|
|
|
|
22,411
|
|
All other loans
|
|
|
652
|
|
|
|
669
|
|
Total loans
|
|
$
|
516,363
|
|
|
$
|
513,008
|
|
Loans receivable
on nonaccrual status are summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars are in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Real estate secured:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,469
|
|
|
$
|
2,035
|
|
Construction and land development
|
|
|
210
|
|
|
|
470
|
|
Residential 1-4 family
|
|
|
3,202
|
|
|
|
2,991
|
|
Multifamily
|
|
|
85
|
|
|
|
152
|
|
Farmland
|
|
|
827
|
|
|
|
800
|
|
Total real estate loans
|
|
|
7,793
|
|
|
|
6,448
|
|
Commercial
|
|
|
411
|
|
|
|
1,065
|
|
Agriculture
|
|
|
3
|
|
|
|
3
|
|
Consumer installment loans
|
|
|
20
|
|
|
|
48
|
|
Total loans receivable on nonaccrual status
|
|
$
|
8,227
|
|
|
$
|
7,564
|
|
Total interest income not recognized on nonaccrual
loans for the three months ended March 31, 2018 and 2017 was $180 thousand and $363 thousand, respectively.
The following
table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2018 and December
31, 2017:
|
|
|
|
|
|
|
As
of March 31, 2018
(Dollars
are in thousands)
|
|
Recorded
Investment
|
|
Unpaid
Principal Balance
|
|
Related
Allowance
|
With
no related allowance recorded:
|
|
|
|
|
|
|
Real
estate secured:
|
|
|
|
|
|
|
Commercial
|
$
|
2,828
|
$
|
2,882
|
$
|
-
|
Construction
and land development
|
|
165
|
|
362
|
|
-
|
Residential
1-4 family
|
|
3,144
|
|
3,206
|
|
-
|
Multifamily
|
|
212
|
|
253
|
|
-
|
Farmland
|
|
1,165
|
|
1,191
|
|
-
|
Commercial
|
|
13
|
|
13
|
|
-
|
Agriculture
|
|
3
|
|
3
|
|
-
|
Consumer
installment loans
|
|
-
|
|
-
|
|
-
|
All
other loans
|
|
-
|
|
-
|
|
-
|
With
an allowance recorded:
|
|
|
|
|
|
|
Real
estate secured:
|
|
|
|
|
|
|
Commercial
|
|
2,047
|
|
2,047
|
|
365
|
Construction
and land development
|
|
-
|
|
-
|
|
-
|
Residential
1-4 family
|
|
358
|
|
358
|
|
89
|
Multifamily
|
|
-
|
|
-
|
|
-
|
Farmland
|
|
368
|
|
368
|
|
232
|
Commercial
|
|
461
|
|
461
|
|
147
|
Agriculture
|
|
-
|
|
-
|
|
-
|
Consumer
installment loans
|
|
8
|
|
8
|
|
2
|
All
other loans
|
|
-
|
|
-
|
|
19
|
Total
|
$
|
10,772
|
$
|
11,152
|
$
|
854
|
As
of December 31, 2017
(Dollars
are in thousands)
|
|
Recorded
Investment
|
|
Unpaid
Principal Balance
|
|
Related
Allowance
|
With
no related allowance recorded:
|
|
|
|
|
|
|
Real
estate secured:
|
|
|
|
|
|
|
Commercial
|
$
|
2,646
|
$
|
2,719
|
$
|
-
|
Construction
and land development
|
|
424
|
|
680
|
|
-
|
Residential
1-4 family
|
|
3,586
|
|
3,885
|
|
-
|
Multifamily
|
|
281
|
|
321
|
|
-
|
Farmland
|
|
1,264
|
|
1,664
|
|
-
|
Commercial
|
|
628
|
|
628
|
|
-
|
Agriculture
|
|
12
|
|
12
|
|
-
|
Consumer
installment loans
|
|
8
|
|
8
|
|
-
|
All
other loans
|
|
-
|
|
-
|
|
-
|
With
an allowance recorded:
|
|
|
|
|
|
|
Real
estate secured:
|
|
|
|
|
|
|
Commercial
|
|
2,503
|
|
2,622
|
|
499
|
Construction
and land development
|
|
-
|
|
-
|
|
-
|
Residential
1-4 family
|
|
421
|
|
437
|
|
91
|
Multifamily
|
|
-
|
|
-
|
|
-
|
Farmland
|
|
378
|
|
378
|
|
243
|
Commercial
|
|
489
|
|
572
|
|
413
|
Agriculture
|
|
-
|
|
-
|
|
-
|
Consumer
installment loans
|
|
-
|
|
-
|
|
-
|
All
other loans
|
|
-
|
|
-
|
|
-
|
Total
|
$
|
12,640
|
$
|
13,926
|
$
|
1,246
|
The following
table presents information concerning the Company’s average impaired loans and interest recognized on those impaired loans,
for the periods indicated:
|
|
Three Months Ended
|
|
|
March 31, 2018
|
|
March 31, 2017
|
(Dollars are in thousands)
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,737
|
|
|
$
|
28
|
|
|
$
|
3,196
|
|
|
$
|
25
|
|
Construction and land development
|
|
|
295
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
Residential 1-4 family
|
|
|
3,365
|
|
|
|
42
|
|
|
|
3,821
|
|
|
|
49
|
|
Multifamily
|
|
|
247
|
|
|
|
4
|
|
|
|
516
|
|
|
|
12
|
|
Farmland
|
|
|
1,215
|
|
|
|
12
|
|
|
|
3,884
|
|
|
|
(115
|
)
|
Commercial
|
|
|
321
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
8
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
Consumer installment loans
|
|
|
4
|
|
|
|
—
|
|
|
|
18
|
|
|
|
—
|
|
All other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,275
|
|
|
|
16
|
|
|
|
901
|
|
|
|
2
|
|
Construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
235
|
|
|
|
—
|
|
Residential 1-4 family
|
|
|
390
|
|
|
|
4
|
|
|
|
701
|
|
|
|
9
|
|
Multifamily
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
373
|
|
|
|
—
|
|
|
|
590
|
|
|
|
5
|
|
Commercial
|
|
|
475
|
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Consumer installment loans
|
|
|
4
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
All other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
11,709
|
|
|
$
|
106
|
|
|
$
|
13,961
|
|
|
$
|
(13
|
)
|
An age analysis
of past due loans receivable is below. At March 31, 2018 and December 31, 2017, there were no loans over 90 days past due that
were accruing.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
(Dollars are in thousands)
|
|
Loans
30-59
Days
Past
Due
|
|
Loans
60-89
Days
Past
Due
|
|
Loans
90
or
More
Days
Past
Due
|
|
Total
Past
Due
Loans
|
|
Current
Loans
|
|
Total
Loans
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,596
|
$
|
25
|
$
|
318
|
$
|
1,939
|
$
|
130,833
|
$
|
132,772
|
Construction
and land
development
|
|
561
|
|
-
|
|
42
|
|
603
|
|
22,755
|
|
23,358
|
Residential
1-4 family
|
|
1,832
|
|
508
|
|
815
|
|
3,155
|
|
246,811
|
|
249,966
|
Multifamily
|
|
-
|
|
-
|
|
-
|
|
-
|
|
14,143
|
|
14,143
|
Farmland
|
|
1,547
|
|
245
|
|
-
|
|
1,792
|
|
23,011
|
|
24,803
|
Total
real estate loans
|
|
5,536
|
|
778
|
|
1,175
|
|
7,489
|
|
437,553
|
|
445,042
|
Commercial
|
|
-
|
|
-
|
|
-
|
|
-
|
|
44,760
|
|
44,760
|
Agriculture
|
|
3
|
|
13
|
|
-
|
|
16
|
|
3,941
|
|
3,957
|
Consumer
installment
Loans
|
|
26
|
|
9
|
|
-
|
|
35
|
|
21,917
|
|
21,952
|
All
other loans
|
|
-
|
|
-
|
|
-
|
|
-
|
|
652
|
|
652
|
Total
loans
|
$
|
5,565
|
$
|
800
|
$
|
1,175
|
$
|
7,540
|
$
|
508,823
|
$
|
516,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
(Dollars are in thousands)
|
|
Loans
30-59
Days
Past
Due
|
|
Loans
60-89
Days
Past
Due
|
|
Loans
90
or
More
Days
Past
Due
|
|
Total
Past
Due
Loans
|
|
Current
Loans
|
|
Total
Loans
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
190
|
$
|
2,396
|
$
|
453
|
$
|
3,039
|
$
|
124,649
|
$
|
127,688
|
Construction
and land
development
|
|
69
|
|
246
|
|
42
|
|
357
|
|
29,406
|
|
29,763
|
Residential
1-4 family
|
|
3,789
|
|
378
|
|
969
|
|
5,136
|
|
244,023
|
|
249,159
|
Multifamily
|
|
125
|
|
89
|
|
-
|
|
214
|
|
15,267
|
|
15,481
|
Farmland
|
|
309
|
|
-
|
|
-
|
|
309
|
|
22,689
|
|
22,998
|
Total
real estate loans
|
|
4,482
|
|
3,109
|
|
1,464
|
|
9,055
|
|
436,034
|
|
445,089
|
Commercial
|
|
103
|
|
25
|
|
603
|
|
731
|
|
40,614
|
|
41,345
|
Agriculture
|
|
38
|
|
-
|
|
-
|
|
38
|
|
3,456
|
|
3,494
|
Consumer
installment
Loans
|
|
102
|
|
15
|
|
28
|
|
145
|
|
22,266
|
|
22,411
|
All
other loans
|
|
-
|
|
-
|
|
-
|
|
-
|
|
669
|
|
669
|
Total
loans
|
$
|
4,725
|
$
|
3,149
|
$
|
2,095
|
$
|
9,969
|
$
|
503,039
|
$
|
513,008
|
The Company
categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their
debt such as: current financial information, historical payment experience, credit documentation, public information, and current
economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit
risk. The Company uses the following definitions for risk ratings:
Pass
- Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability
of the borrowers to service their debt and other factors.
Special
Mention
- Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s
operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point
of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light
of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the
loan or inadequately protect the Company’s credit position at some future date.
Substandard
-
A substandard loan is inadequately protected by the current sound net worth and paying capacity
of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected.
Doubtful
-
Loans classified Doubtful have all the
weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.
Based on the most recent analysis
performed, the risk category of loans receivable was as follows:
|
|
|
|
|
|
|
|
|
As
of March 31, 2018
(Dollars
are in thousands)
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Total
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
124,316
|
$
|
4,489
|
$
|
3,967
|
$
|
132,772
|
Construction
and land development
|
|
22,353
|
|
781
|
|
224
|
|
23,358
|
Residential
1-4 family
|
|
242,363
|
|
3,096
|
|
4,507
|
|
249,966
|
Multifamily
|
|
13,792
|
|
81
|
|
270
|
|
14,143
|
Farmland
|
|
21,814
|
|
1,818
|
|
1,171
|
|
24,803
|
Total
real estate loans
|
|
424,638
|
|
10,265
|
|
10,139
|
|
445,042
|
Commercial
|
|
39,741
|
|
4,608
|
|
411
|
|
44,760
|
Agriculture
|
|
3,925
|
|
16
|
|
16
|
|
3,957
|
Consumer
installment loans
|
|
21,930
|
|
1
|
|
21
|
|
21,952
|
All
other loans
|
|
652
|
|
-
|
|
-
|
|
652
|
Total
|
$
|
490,886
|
$
|
14,890
|
$
|
10,587
|
$
|
516,363
|
As
of December 31, 2017
(Dollars
are in thousands)
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Total
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
120,104
|
$
|
3,228
|
$
|
4,356
|
$
|
127,688
|
Construction
and land development
|
|
28,462
|
|
816
|
|
485
|
|
29,763
|
Residential
1-4 family
|
|
243,048
|
|
1,810
|
|
4,301
|
|
249,159
|
Multifamily
|
|
13,695
|
|
1,445
|
|
341
|
|
15,481
|
Farmland
|
|
19,273
|
|
2,445
|
|
1,280
|
|
22,998
|
Total
real estate loans
|
|
424,582
|
|
9,744
|
|
10,763
|
|
445,089
|
Commercial
|
|
37,973
|
|
2,307
|
|
1,065
|
|
41,345
|
Agriculture
|
|
3,468
|
|
23
|
|
3
|
|
3,494
|
Consumer
installment loans
|
|
22,357
|
|
2
|
|
52
|
|
22,411
|
All
other loans
|
|
669
|
|
-
|
|
-
|
|
669
|
Total
|
$
|
489,049
|
$
|
12,076
|
$
|
11,883
|
$
|
513,008
|
NOTE 7
ALLOWANCE FOR LOAN LOSSES:
The following
table details activity in the allowance for loan losses by portfolio segment for the period ended March 31, 2018. Allocation of
a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2018
(Dollars
are in thousands)
|
|
Beginning
Balance
|
|
Charge
Offs
|
|
Recoveries
|
|
Provisions
|
|
Ending
Balance
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,989
|
$
|
-
|
$
|
8
|
$
|
(156)
|
$
|
1,841
|
Construction
and land development
|
|
191
|
|
(96)
|
|
-
|
|
59
|
|
154
|
Residential
1-4 family
|
|
2,400
|
|
(44)
|
|
29
|
|
(19)
|
|
2,366
|
Multifamily
|
|
106
|
|
-
|
|
-
|
|
(2)
|
|
104
|
Farmland
|
|
415
|
|
-
|
|
56
|
|
(48)
|
|
423
|
Total
real estate loans
|
|
5,101
|
|
(140)
|
|
93
|
|
(166)
|
|
4,888
|
Commercial
|
|
660
|
|
(515)
|
|
8
|
|
426
|
|
579
|
Agriculture
|
|
20
|
|
-
|
|
-
|
|
6
|
|
26
|
Consumer
installment loans
|
|
156
|
|
(26)
|
|
23
|
|
-
|
|
153
|
All
other loans
|
|
3
|
|
-
|
|
-
|
|
17
|
|
20
|
Unallocated
|
|
256
|
|
-
|
|
-
|
|
(220)
|
|
36
|
Total
|
$
|
6,196
|
$
|
(681)
|
$
|
124
|
$
|
63
|
$
|
5,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
Recorded
Investment in Loans
|
As
of March 31, 2018
(Dollars
are in thousands)
|
|
Individually
Evaluated
for
Impairment
|
|
Collectively
Evaluated for Impairment
|
|
Total
|
|
Individually
Evaluated
for Impairment
|
|
Collectively
Evaluated for Impairment
|
|
Total
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
365
|
$
|
1,476
|
$
|
1,841
|
$
|
4,875
|
$
|
127,897
|
$
|
132,772
|
Construction
and land
development
|
|
-
|
|
154
|
|
154
|
|
165
|
|
23,193
|
|
23,358
|
Residential
1-4 family
|
|
89
|
|
2,277
|
|
2,366
|
|
3,502
|
|
246,464
|
|
249,966
|
Multifamily
|
|
-
|
|
104
|
|
104
|
|
212
|
|
13,931
|
|
14,143
|
Farmland
|
|
232
|
|
191
|
|
423
|
|
1,533
|
|
23,270
|
|
24,803
|
Total
real estate loans
|
|
686
|
|
4,202
|
|
4,888
|
|
10,287
|
|
434,755
|
|
445,042
|
Commercial
|
|
147
|
|
432
|
|
579
|
|
474
|
|
44,286
|
|
44,760
|
Agriculture
|
|
-
|
|
26
|
|
26
|
|
3
|
|
3,954
|
|
3,957
|
Consumer
installment loans
|
|
2
|
|
151
|
|
153
|
|
8
|
|
21,944
|
|
21,952
|
All
other loans
|
|
19
|
|
1
|
|
20
|
|
-
|
|
652
|
|
652
|
Unallocated
|
|
-
|
|
36
|
|
36
|
|
-
|
|
-
|
|
-
|
Total
|
$
|
854
|
$
|
4,848
|
$
|
5,702
|
$
|
10,772
|
$
|
505,591
|
$
|
516,363
|
The following
table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2017. Allocation
of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2017
(Dollars
are in thousands)
|
|
Beginning
Balance
|
|
Charge
Offs
|
|
Recoveries
|
|
Provisions
|
|
Ending
Balance
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,625
|
$
|
(179)
|
$
|
193
|
$
|
350
|
$
|
1,989
|
Construction
and land development
|
|
346
|
|
(1)
|
|
-
|
|
(154)
|
|
191
|
Residential
1-4 family
|
|
2,376
|
|
(714)
|
|
48
|
|
690
|
|
2,400
|
Multifamily
|
|
241
|
|
-
|
|
-
|
|
(135)
|
|
106
|
Farmland
|
|
428
|
|
(49)
|
|
361
|
|
(325)
|
|
415
|
Total
real estate loans
|
|
5,016
|
|
(943)
|
|
602
|
|
426
|
|
5,101
|
Commercial
|
|
163
|
|
(11)
|
|
153
|
|
355
|
|
660
|
Agriculture
|
|
31
|
|
(4)
|
|
5
|
|
(12)
|
|
20
|
Consumer
installment loans
|
|
123
|
|
(147)
|
|
19
|
|
161
|
|
156
|
All
other loans
|
|
-
|
|
-
|
|
-
|
|
3
|
|
3
|
Unallocated
|
|
739
|
|
-
|
|
-
|
|
(483)
|
|
256
|
Total
|
$
|
6,072
|
$
|
(1,105)
|
$
|
779
|
$
|
450
|
$
|
6,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Loan Losses
|
|
Recorded
Investment in Loans
|
As
of December 31, 2017
(Dollars
are in thousands)
|
|
Individually
Evaluated
for
Impairment
|
|
Collectively
Evaluated for Impairment
|
|
Total
|
|
Individually
Evaluated
for Impairment
|
|
Collectively
Evaluated for Impairment
|
|
Total
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
499
|
$
|
1,490
|
$
|
1,989
|
$
|
5,149
|
$
|
122,539
|
$
|
127,688
|
Construction
and land
development
|
|
-
|
|
191
|
|
191
|
|
424
|
|
29,339
|
|
29,763
|
Residential
1-4 family
|
|
91
|
|
2,309
|
|
2,400
|
|
4,007
|
|
245,152
|
|
249,159
|
Multifamily
|
|
-
|
|
106
|
|
106
|
|
281
|
|
15,200
|
|
15,481
|
Farmland
|
|
243
|
|
172
|
|
415
|
|
1,642
|
|
21,356
|
|
22,998
|
Total
real estate loans
|
|
833
|
|
4,268
|
|
5,101
|
|
11,503
|
|
433,586
|
|
445,089
|
Commercial
|
|
413
|
|
247
|
|
660
|
|
1,117
|
|
40,228
|
|
41,345
|
Agriculture
|
|
-
|
|
20
|
|
20
|
|
12
|
|
3,482
|
|
3,494
|
Consumer
installment loans
|
|
-
|
|
156
|
|
156
|
|
8
|
|
22,403
|
|
22,411
|
All
other loans
|
|
-
|
|
3
|
|
3
|
|
-
|
|
669
|
|
669
|
Unallocated
|
|
-
|
|
256
|
|
256
|
|
-
|
|
-
|
|
-
|
Total
|
$
|
1,246
|
$
|
4,950
|
|
6,196
|
$
|
12,640
|
$
|
500,368
|
$
|
513,008
|
In determining
the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic
conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect,
our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.
NOTE 8
TROUBLED DEBT RESTRUCTURINGS:
At March 31, 2018 there were $6.2 million
in loans that are classified as troubled debt restructurings compared to $6.9 million at December 31, 2017. The following table
presents information related to loans modified as troubled debt restructurings during the three months ended March 31, 2018 and
2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended
March
31, 2018
|
|
For
the three months ended
March
31, 2017
|
Troubled Debt Restructurings
(Dollars are in thousands)
|
#
of Loans
|
|
Pre-Mod.
Recorded Investment
|
|
Post-Mod.
Recorded
Investment
|
|
#
of
Loans
|
|
Pre-Mod.
Recorded
Investment
|
|
Post-Mod.
Recorded
Investment
|
Real
estate secured:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
-
|
$
|
-
|
$
|
-
|
|
1
|
$
|
341
|
$
|
339
|
Construction
and land
Development
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Residential
1-4 family
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Multifamily
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Farmland
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Total
real estate loans
|
-
|
|
-
|
|
-
|
|
1
|
|
341
|
|
339
|
Commercial
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Agriculture
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Consumer
installment loans
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
All
other loans
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Total
|
-
|
$
|
-
|
$
|
-
|
|
1
|
$
|
341
|
$
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
three months ended March 31, 2018, the Company modified no loans for which the modification was considered to be a troubled debt
restructuring. During the three months ended March 31, 2017, the Company modified the terms of one loan for which the modification
was considered to be a troubled debt restructuring. The interest rate and maturity date were not modified; however, the payment
terms were changed.
No loans modified as troubled debt restructurings
defaulted during the three months ended March 31, 2018 or 2017. Generally, a troubled debt restructuring is considered to be in
default once it becomes 90 days or more past due following a modification.
In determination
of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings
in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance
may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further writedown
the carrying value of the loan.
NOTE 9
OTHER REAL ESTATE OWNED:
The following
table summarizes the activity in other real estate owned for the three months ended March 31, 2018 and the year ended December
31, 2017:
(Dollars are in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
6,859
|
|
|
$
|
10,655
|
|
Additions
|
|
|
1,023
|
|
|
|
3,087
|
|
Transfers of premises and equipment
to other real estate
|
|
|
—
|
|
|
|
125
|
|
Proceeds from sales
|
|
|
(739
|
)
|
|
|
(4,742
|
)
|
Proceeds from insurance claims
|
|
|
—
|
|
|
|
(12
|
)
|
Loans made to finance sales
|
|
|
(267
|
)
|
|
|
(1,477
|
)
|
Adjustment of carrying value
|
|
|
(69
|
)
|
|
|
(758
|
)
|
Deferred gain from sales
|
|
|
—
|
|
|
|
45
|
|
Losses from sales
|
|
|
(96
|
)
|
|
|
(64
|
)
|
Balance, end of period
|
|
$
|
6,711
|
|
|
$
|
6,859
|
|
NOTE 10
FAIR VALUES:
The financial
reporting standard, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under
generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in
the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example,
available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired
through foreclosure).
Fair value
is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Fair Value Measurements and Disclosures also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted
prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities
and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed
debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2: Observable
inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently
than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are
observable in the market or can be derived principally from or corroborated by observable market data. This category generally
includes certain derivative contracts and impaired loans.
Level 3: Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management
judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests
in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
Investment
Securities Available-for-Sale –
Investment securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices if available. If quoted prices are not available, fair value is measured using
independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted
for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities
include those traded on an active exchange such as the New York Stock Exchange, or by dealers or brokers in active over-the counter
markets. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate
debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Assets measured
at fair value on a recurring basis are as follows. There were no liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
(Dollars are in thousands)
March 31, 2018
|
|
Quoted market price in active markets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
Available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
—
|
|
|
$
|
22,613
|
|
|
$
|
—
|
|
Taxable municipals
|
|
|
—
|
|
|
|
4,292
|
|
|
|
—
|
|
Corporate bonds
|
|
|
—
|
|
|
|
5,406
|
|
|
|
—
|
|
Mortgage backed securities
|
|
|
—
|
|
|
|
34,722
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
67,033
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
$
|
—
|
|
|
$
|
23,844
|
|
|
$
|
—
|
|
Taxable municipals
|
|
|
—
|
|
|
|
4,397
|
|
|
|
—
|
|
Corporate bonds
|
|
|
—
|
|
|
|
5,579
|
|
|
|
—
|
|
Mortgage backed securities
|
|
|
—
|
|
|
|
37,268
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
71,088
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans -
The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority
of the Company’s loans. When a loan is considered impaired a specific reserve may be established. Loans which are deemed
to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate
collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines whether or not
the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or whether
or not an appraised value does not include estimated costs of disposition. The Company records impaired loans as nonrecurring
Level 3 assets.
Foreclosed
Assets
–
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.
Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable
market prices or appraised values of the collateral with a third party less an estimate of disposition costs, which the Company
considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral
if further impaired below the appraised value and there is no observable market price, or an appraised value does not include
estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring
Level 3.
Assets measured
at fair value on a non-recurring basis are as follows (for purpose of this table the impaired loans are shown net of the related
allowance). There were no liabilities measured at fair value on a non-recurring basis.
|
|
|
|
|
|
|
(Dollars are in thousands)
March 31, 2018
|
|
Quoted market price in active markets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
Other real estate owned
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,711
|
|
Impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
9,918
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,859
|
|
Impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
11,394
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Level
3 assets measured at fair value on a recurring or non-recurring basis, the significant unobservable inputs used in the fair value
measurements were as follows:
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:
|
(Dollars in thousands)
|
|
Fair
Value at March 31,
2018
|
|
Valuation
Technique
|
|
Significant
Unobservable Inputs
|
|
General
Range of Significant Unobservable Input Values
|
Impaired
Loans
|
$
|
9,918
|
|
Appraised
Value/Discounted Cash Flows/Market Value of Note
|
|
Discounts
to reflect current market conditions, ultimate collectability, and estimated costs to sell
|
|
0
– 18%
|
|
|
|
|
|
|
|
|
|
Other
Real Estate Owned
|
|
6,711
|
|
Appraised
Value/Comparable Sales/Other Estimates from Independent Sources
|
|
Discounts
to reflect current market conditions and estimated costs to sell
|
|
0
– 18%
|
Fair
Value of Financial Instruments
Fair value
information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate
the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include
cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation
to either receive or deliver cash for another financial instrument.
The
information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be
precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest
rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will
actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.
The tables
below present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.
This table excludes financial instruments for which the carrying amount approximates fair value.
The
carrying value of cash and due from banks, federal funds sold, interest-bearing deposits with banks, deposits with no stated maturities,
and accrued interest approximates fair value.
During the
first quarter of 2018, the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities.”
The amendments included within this standard, which are applied prospectively, require the Company to disclose fair value of financial
instruments measured at amortized cost on the balance sheet to measure that fair value using an exit price notion. Prior to adopting
the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry
price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected
future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors,
such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets.
As of March
31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to
those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously
applied entry price notion. The fair value of the Company’s loan portfolio has always included a credit risk assumption
in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that
a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair
valued using a segmented approach. The Company divides its loan portfolio into the following categories: variable rate loans,
impaired loans and all other loans. The results are then adjusted to account for credit risk as described above. However, under
the new guidance, the Company believes a further credit risk discount must be applied through the use of a discounted cash flow
model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily
the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced
credit risk provides an estimated exit price for the Company’s loan portfolio.
For variable-rate
loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values
for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.
As of December
31, 2017, the fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair
value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize
in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach.
The Company divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans.
The results are then adjusted to account for credit risk. For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted
cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted
cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality.
The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate
credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price as of December
31, 2017.
The
remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates
in effect for similar instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
(Dollars
are in thousands)
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Quoted
market price in active markets
(Level
1)
|
|
Significant
other observable inputs
(Level
2)
|
|
Significant
unobservable inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2018
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments – Assets
|
|
|
|
|
|
|
|
|
|
|
Net
Loans
|
$
|
510,661
|
$
|
499,763
|
$
|
-
|
$
|
489,845
|
$
|
9,918
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments – Liabilities
|
|
|
|
|
|
|
|
|
|
|
Time
Deposits
|
|
265,025
|
|
264,945
|
|
-
|
|
264,945
|
|
-
|
FHLB
Advances
|
|
7,258
|
|
7,557
|
|
-
|
|
7,557
|
|
-
|
Trust
Preferred Securities
|
|
16,496
|
|
13,575
|
|
-
|
|
13,575
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments – Assets
|
|
|
|
|
|
|
|
|
|
|
Net
Loans
|
$
|
506,812
|
$
|
506,608
|
$
|
-
|
$
|
495,214
|
$
|
11,394
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Instruments – Liabilities
|
|
|
|
|
|
|
|
|
|
|
Time
Deposits
|
|
272,330
|
|
272,352
|
|
-
|
|
272,352
|
|
-
|
FHLB
Advances
|
|
7,558
|
|
7,794
|
|
-
|
|
7,794
|
|
-
|
Trust
Preferred Securities
|
|
16,496
|
|
16,496
|
|
-
|
|
16,496
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
NOTE 11 SALE AND LEASEBACK TRANSACTIONS:
On May 31,
2017 the Bank, the wholly-owned subsidiary of the Company, sold four (4) of its properties, one each located in Abingdon, Bristol,
Gate City and Castlewood, Virginia to a nonaffiliated third party for a total purchase price of $6.2 million. After selling expenses
of $192 thousand, the net proceeds on the transactions were $6.0 million. The sales prices for the properties were based on outside
appraisals obtained by the Bank. The Bank provided $4.9 million of financing to the purchaser for a term of 10 years for this
transaction.
In connection
with the sale of the four properties, the Bank on May 31, 2017 entered into commercial lease agreements with the purchaser for
the properties (the “Leases”), which will allow the Bank to continue to service customers from these locations. The
Leases, which commenced on June 1, 2017, provide the Bank with use of the properties for an initial term of fifteen (15) years.
Base rent payments for years 1 through 5 of the Leases are approximately $417 thousand a year. The base rent payments will increase
by 8% for years 6 through 10 of the Leases and then by another 8% for years 11 through 15 of the Leases. The Bank has the option
to renew the Leases five (5) times and each renewal would be for a term of five (5) years. The base rent for the renewals would
be negotiated at the time the renewal option is exercised by the Bank. While the cash lease payments are currently $417 thousand
a year, the Company is required to straight-line the expense over the initial term of fifteen (15) years. As a result, the annual
lease expense will be approximately $451 thousand. The weighted average remaining life of the leases is 14.17 years.
In anticipation
of this transaction the Company adopted ASU No. 2016-02 Leases (Topic 842) early. This ASU revised certain aspects of recognition,
measurement, presentation, and disclosure of leasing transactions. As a result of this transaction the Company recognized initial
right-to-use assets – operating leases of approximately $5.3 million, along with corresponding lease liabilities of approximately
$5.3 million. The $5.3 million was determined by calculating the present value of the annual cash lease payments using a discount
rate of 3.25%. The 3.25% discount rate was determined to be our fifteen (15) year incremental borrowing rate as of May 31, 2017.
As a result
of the sale and the determination that the corresponding leases were operating leases, the Company also recognized a gain in 2017
of $2.6 million on the sale and leaseback transactions.
NOTE 12
NONINTEREST EXPENSES:
Other operating
expenses, included as part of noninterest expenses, consisted of the following for the periods presented:
(Dollars are in thousands)
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
|
|
|
Advertising
|
|
$
|
126
|
|
|
$
|
93
|
|
ATM network expense
|
|
|
392
|
|
|
|
403
|
|
Legal and professional fees
|
|
|
367
|
|
|
|
297
|
|
Loan related expenses
|
|
|
200
|
|
|
|
184
|
|
Printing and supplies
|
|
|
136
|
|
|
|
24
|
|
FDIC insurance premiums
|
|
|
96
|
|
|
|
102
|
|
Other real estate owned, net
|
|
|
247
|
|
|
|
300
|
|
Other
|
|
|
535
|
|
|
|
514
|
|
Total noninterest expenses
|
|
$
|
2,099
|
|
|
$
|
1,917
|
|
NOTE 13
SUBSEQUENT EVENTS:
Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized
subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the
balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events
are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent
events occurred requiring accrual or disclosure.
NOTE 14
RECENT ACCOUNTING DEVELOPMENTS:
The following
is a summary of recent authoritative announcements:
In May 2014,
the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts
with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods
and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance became
effective January 1, 2018. The amendment does not apply to revenue associated with financial instruments, such as loans and investment
securities available for sale, and therefore had no material effect on our consolidated financial statements.
In January
2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification (“ASC”), to address
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments became effective
on January 1, 2018 and did not have a material effect on the financial statements. As discussed in Note 10, the Company measured
the fair value of its loan portfolio using an exit price notion as of March 31, 2018.
In February
2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure
of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. As discussed in Note 11, the Company early adopted ASU No. 2016-02 Leases (Topic 842).
In March 2016, the FASB amended the Revenue
from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations
and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties.
The guidance became effective January 1, 2018. The Company completed an assessment of revenue streams and a review of related contracts
potentially affected by the ASU and, based on this assessment, the Company concluded that the ASU did not materially change the
method in which the Company currently recognizes revenue for these revenue streams. As such, a cumulative effect adjustment to
opening retained earnings was not deemed necessary.
In June 2016,
the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted
for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation
of the new standard will have on its financial position, results of operations, and cash flows.
In December
2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections
make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The amendment became
effective on January 1, 2018 and did not have a material effect on the financial statements.
In January
2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures
Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance
about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses
standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements
as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position,
results of operations or cash flows.
In February
2017, the FASB amended the Other Income Topic of the ASC to clarify the scope of the guidance on nonfinancial asset derecognition
as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial
assets with the model for transactions in the new revenue standard. The amendment became effective on January 1, 2018 and did
not have a material effect on the financial statements.
In September
2017, the FASB updated the Revenue from Contracts with Customers and the Leases Topics of the Accounting Standards Codification.
The amendments incorporate into the ASC recent SEC guidance about certain public business entities (PBEs) electing to use the
non-PBE effective dates solely to adopt the FASB’s new standards on revenue and leases. The amendments were effective upon
issuance. The Company is currently in the process of evaluating the impact of adoption of this guidance, however it does not expect
these amendments to have a material effect on its financial statements.
In November
2017, the FASB updated the Income Statement and Revenue from Contracts with Customers Topics of the Accounting Standards Codification.
The amendments incorporate into the ASC recent SEC guidance related to revenue recognition. The amendments were effective upon
issuance and did not have a material effect on the financial statements.
In February 2018, the FASB Issued (ASU 2018-02),
Income Statement (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which requires
Companies to reclassify the stranded effects in other comprehensive income to retained earnings as a result of the change in the
tax rates under the Tax Cuts and Jobs Act. The Company has opted to early adopt this pronouncement by retrospective application
to each period (or periods) in which the effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The
impact of the reclassification from other comprehensive income to retained earnings was $98 thousand as of December 31, 2017.
In February
2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The amendments clarify certain
aspects of the guidance issued in ASU 2016-01. The amendments will be effective for the third quarter of 2018 subsequent to adopting
the amendments in ASU 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these
amendments to have a material effect on its financial statements.
In March 2018,
the FASB updated the Debt Securities and the Regulated Operations Topics of the Accounting Standards Codification. The amendments
incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive
guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments
were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2018,
the FASB updated the Income Taxes Topic of the Accounting Standards Codification. The amendments incorporate into the Accounting
Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The
amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material
impact on the Company’s financial position, results of operations or cash flows.