UNITED STATES

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 June 30, 2016

 

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

 

For the transition period from ____________ to _____________

 

Commission file number: 000-33411

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

     

Virginia

(State or other jurisdiction of

incorporation or organization)

 

 

31-1804543

(I.R.S. Employer

Identification No.)

 
       

67 Commerce Drive

Honaker, Virginia

(Address of principal executive offices)

 

 

24260

(Zip Code)

 
         

 

 
(Registrant’s telephone number, including area code) (276) 873-7000

 

 

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

         
Yes [X]   No [ ]

 

 

 
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X]   No [ ]

 

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

     
Large accelerated filer  [ ]   Accelerated filer  [ ]
Non-accelerated filer  [ ]   Smaller reporting company  [X]

 

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

 

         
Yes [ ]   No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

     
Class   Outstanding at August 12, 2016
Common Stock, $2.00 par value   23,354,082

 

 

 
 

NEW PEOPLES BANKSHARES, INC.

 

INDEX  
     
    Page
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements  
Consolidated Statements of Income – Six Months    
Ended June 30, 2016 and 2015 (Unaudited)   1
     
Consolidated Statements of Income – Three Months    
Ended June 30, 2016 and 2015 (Unaudited)   3
Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months    
Ended June 30, 2016 and 2015 (Unaudited)   5
     
Consolidated Balance Sheets – June 30, 2016 (Unaudited) and December 31, 2015   6
     
Consolidated Statements of Changes in Stockholders’ Equity -    
Six Months Ended June 30, 2016 and 2015 (Unaudited)   8
     
Consolidated Statements of Cash Flows – Six Months    
Ended June 30, 2016 and 2015 (Unaudited)   9
     
Notes to Consolidated Financial Statements   11
     

 

 

 
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
     
Item 4. Controls and Procedures 39
     
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
     
SIGNATURES   40

 

 
 

Part I Financial Information

Item 1 Financial Statements

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

       
INTEREST AND DIVIDEND INCOME  2016  2015
Loans including fees  $11,178   $11,706 
Federal funds sold   —      2 
Interest-earning deposits with banks   44    55 
Investments   827    849 
Dividends on equity securities (restricted)   64    66 
Total Interest and Dividend Income   12,113    12,678 
           
INTEREST EXPENSE          
Deposits          
  Demand   24    18 
  Savings   78    85 
  Time deposits below $100,000   535    747 
  Time deposits above $100,000   312    522 
FHLB advances   64    78 
Federal funds purchased   2    —   
Trust preferred securities   245    217 
Total Interest Expense   1,260    1,667 
           
NET INTEREST INCOME   10,853    11,011 
           
PROVISION FOR LOAN LOSSES   (500)   —   
           
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   11,353    11,011 
           
NONINTEREST INCOME          
Service charges   1,072    1,088 
Fees, commissions and other income   1,663    1,537 
Insurance and investment fees   301    256 
Net realized gains on sale of investment securities   240    35 
Life insurance investment income   63    69 
Total Noninterest Income   3,339    2,985 
           
NONINTEREST EXPENSES          
Salaries and employee benefits   6,549    5,824 
Occupancy and equipment expense   1,921    1,862 
Advertising and public relations   233    129 
Data processing and telecommunications   1,157    1,002 
FDIC insurance premiums   270    439 
Other real estate owned and repossessed vehicles, net   252    1,066 
Other operating expenses   2,731    2,587 
Total Noninterest Expenses   13,113    12,909 
           

 

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INCOME BEFORE INCOME TAXES   1,579    1,087 
           
INCOME TAX EXPENSE (BENEFIT)   (1)   3 
           
NET INCOME  $1,580   $1,084 
           
Income Per Share          
Basic  $0.07   $0.05 
Fully Diluted  $0.07   $0.05 
           
Average Weighted Shares of Common Stock          
Basic   23,354,082    22,878,654 
Fully Diluted   23,354,082    22,878,654 

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

       
       
INTEREST AND DIVIDEND INCOME  2016  2015
Loans including fees  $5,613   $5,925 
Federal funds sold   —      1 
Interest-earning deposits with banks   23    29 
Investments   363    423 
Dividends on equity securities (restricted)   32    34 
Total Interest and Dividend Income   6,031    6,412 
           
INTEREST EXPENSE          
Deposits          
  Demand   13    9 
  Savings   37    44 
  Time deposits below $100,000   270    360 
  Time deposits above $100,000   158    251 
FHLB Advances   28    38 
Federal funds purchased   —      —   
Trust Preferred Securities   123    109 
Total Interest Expense   629    811 
           
NET INTEREST INCOME   5,402    5,601 
           
PROVISION FOR LOAN LOSSES   (500)   —   
           
NET INTEREST INCOME AFTER          
PROVISION FOR LOAN LOSSES   5,902    5,601 
           
NONINTEREST INCOME          
Service charges   584    552 
Fees, commissions and other income   858    823 
Insurance and investment fees   143    132 
Net realized gains on sale of investment securities   135    —   
Life insurance investment income   33    34 
Total Noninterest Income   1,753    1,541 
           

 

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NONINTEREST EXPENSES          
Salaries and employee benefits   3,339    2,882 
Occupancy and equipment expense   1,068    920 
Advertising and public relations   129    72 
Data processing and telecommunications   576    503 
FDIC insurance premiums   136    221 
Other real estate owned and repossessed vehicles, net   89    707 
Other operating expenses   1,439    1,375 
Total Noninterest Expenses   6,776    6,680 
           
INCOME BEFORE INCOME TAXES   879    462 
           
INCOME TAX EXPENSE (BENEFIT)   (3)   —   
           
NET INCOME  $882   $462 
           
Income Per Share          
Basic  $0.04   $0.02 
Fully Diluted  $0.04   $0.02 
           
Weighted Average Shares of Common Stock          
Basic   23,354,082    22,878,654 
Fully Diluted   23,354,082    22,878,654 

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(IN THOUSANDS)

(UNAUDITED)

 

             
             
  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2016  2015  2016  2015
             
NET INCOME  $882   $462   $1,580   $1,084 
                     
Other comprehensive income (loss):                    
  Investment Securities Activity                    
    Unrealized gains (losses) arising during the period   694    (893)   1,479    (267)
    Tax related to unrealized gains (losses)   (236)   304    (503)   91 
    Reclassification of realized gains during the period   (135)   —      (240)   (35)
    Tax related to realized gains   46    —      82    12 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)   369    (589)   818    (199)
TOTAL COMPREHENSIVE INCOME (LOSS)  $1,251   $(127)  $2,398   $885 

  

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

       
ASSETS  June 30,  December 31,
   2016  2015
   (Unaudited)  (Audited)
           
Cash and due from banks  $18,412   $15,087 
Interest-bearing deposits with banks   13,821    11,251 
Total Cash and Cash Equivalents   32,233    26,338 
           
Investment securities available-for-sale   76,626    101,642 
           
Loans receivable   459,613    441,169 
Allowance for loan losses   (6,649)   (7,493)
Net Loans   452,964    433,676 
           
Bank premises and equipment, net   31,228    28,148 
Equity securities (restricted)   2,613    2,441 
Other real estate owned   14,134    12,398 
Accrued interest receivable   1,886    1,816 
Life insurance investments   12,168    12,105 
Deferred taxes, net   4,770    5,121 
Other assets   3,689    2,213 
           
        Total Assets  $632,311   $625,898 
           
LIABILITIES          
           
Deposits:          
Demand deposits:          
Noninterest bearing  $148,729   $149,714 
Interest-bearing   42,720    30,251 
Savings deposits   112,037    121,076 
Time deposits   251,598    256,978 
        Total Deposits   555,084    558,019 
           

 

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Federal Home Loan Bank advances   9,358    2,958 
Accrued interest payable   292    288 
Accrued expenses and other liabilities   2,596    2,050 
Trust preferred securities   16,496    16,496 
           
Total Liabilities   583,826    579,811 
           
Commitments and contingencies   —      —   
           
STOCKHOLDERS’ EQUITY          
           
Common stock - $2.00 par value; 50,000,000 shares authorized;          
23,354,082 shares issued and outstanding   46,708    46,708 
Common stock warrants   764    764 
Additional paid-in-capital   13,965    13,965 
Retained deficit   (13,443)   (15,023)
Accumulated other comprehensive income (loss)   491    (327)
           
Total Stockholders’ Equity   48,485    46,087 
           
Total Liabilities and Stockholders’ Equity  $632,311   $625,898 

 

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

 

                      
   Shares of Common Stock  Common Stock  Common Stock Warrants  Additional Paid-in- Capital  Retained  Deficit 

Accum-ulated Other

Compre-hensive Income (Loss)

  Total Stockholders’ Equity
                                    
Balance, December 31, 2014   22,878   $45,757   $1,176   $13,672   $(17,685)  $(69)  $42,851 
                                    
Net income   —      —      —      —      1,084    —      1,084 
Other comprehensive loss,
net of tax
   —      —      —      —      —      (199)   (199)
Balance, June 30, 2015   22,878   $45,757   $1,176   $13,672   $(16,601)  $(268)  $43,736 
                                    
Balance, December 31, 2015   23,354   $46,708   $764   $13,965   $(15,023)  $(327)  $46,087 
                                    
Net income   —      —      —      —      1,580    —      1,580 
                                    
Other comprehensive income,
net of tax
   —      —      —      —      —      818    818 
Balance, June 30, 2016   23,354   $46,708   $764   $13,965   $(13,443)  $491   $48,485 
                                    

 

 

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(IN THOUSANDS)

(UNAUDITED)

 

       
   2016  2015
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $1,580   $1,084 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Depreciation   1,175    1,055 
Provision for loan losses   (500)   —   
Income on life insurance   (63)   (69)
Gain on sale of securities available-for-sale   (240)   (35)
Gain on sale of premises and equipment   —      (66)
Gain on sale of foreclosed assets   (185)   (15)
Adjustment of carrying value of foreclosed real estate   (28)   639 
Accretion of bond premiums/discounts   482    573 
Deferred tax benefit   (70)   —   
Net change in:          
Interest receivable   (70)   104 
Other assets   (1,476)   (26)
Accrued interest payable   4    56 
Accrued expenses and other liabilities   546    (56)
Net Cash Provided by Operating Activities   1,155    3,244 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Net (increase) decrease in loans   (21,383)   10,865 
Purchase of securities available-for-sale   (7,631)   (25,202)
Proceeds from sales and maturities of securities available-for-sale   33,644    16,690 
Sale (Purchase) of Federal Home Loan Bank stock   (172)   30 
Purchase of Federal Reserve Bank stock   —      (37)
Payments for the purchase of premises and equipment   (4,130)   (723)
Payments for the purchase of other real estate owned   —      (5)
Payments for premiums on life insurance investments   —      (65)
Proceeds from sales of premises and equipment   —      179 
Proceeds from insurance on other real estate owned   —      53 
Proceeds from sales of other real estate owned   947    760 
Net Cash Provided by Investing Activities   1,275    2,545 
           

 

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CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase (decrease) in Federal Home Loan Bank advances   6,400    (600)
Net change in:          
Demand deposits   11,484    7,964 
Savings deposits   (9,039)   7,512 
Time deposits   (5,380)   (24,071)
Net Cash Provided by (Used in) Financing Activities   3,465    (9,195)
           
Net increase (decrease) in cash and cash equivalents   5,895    (3,406)
Cash and Cash Equivalents, Beginning of Period   26,338    35,560 
Cash and Cash Equivalents, End of Period   $32,233   $32,154 
           
Supplemental Disclosure of Cash Paid During the Period for:          
     Interest  $1,256   $1,611 
     Taxes  $70   $—   
           
Supplemental Disclosure of Non Cash Transactions:          
     Other real estate acquired in settlement of foreclosed loans  $3,098   $1,869 
     Loans made to finance sale of foreclosed real estate  $503   $148 
     Transfer of other real estate to premises and equipment  $125   $—   
Change in unrealized gains (losses) on securities available-for-sale
  $1,239   $(302)

 

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

 

New Peoples Bankshares, Inc. (“The Company”) is a financial holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (“Bank”) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly-owned subsidiaries; NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004 the Company established NPB Capital Trust I for the purpose of issuing trust preferred securities. On September 27, 2006, the Company established NPB Capital Trust 2 for the purpose of issuing additional trust preferred securities. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank. In June 2012 the name of NPB Financial Services, Inc. was changed to NPB Insurance Services, Inc. which operates solely as an insurance agency. On March 4, 2016 the Federal Reserve Bank of Richmond approved the Company’s election to become a financial holding company.

 

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 June 30, 2016 and December 31, 2015, and the results of operations for the three and six month periods ended June 30, 2016 and 2015. 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, 2015. The results of operations for the three and six month periods ended June 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full year.

 

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 FORMAL WRITTEN AGREEMENT:

 

The Company and the Bank had previously entered into the Written Agreement with the Federal Reserve Bank of Richmond and the Virginia State Corporation Commission Bureau of Financial Institutions. On February 2, 2016, the Company and the Bank announced that they had successfully complied with all of the requirements of the Written Agreement and accordingly, effective January 20, 2016, the agreement had been terminated.

 

Under the terms of the Written Agreement, the Bank developed and submitted for approval, within specified time periods, written plans related to board oversight; the Bank’s management and governance, including management of the Bank’s operations, credit risk management, lending and credit risk administration, management of commercial real estate concentrations; the review and grading of the Bank’s loan portfolio; the  improvement of Bank problem assets in excess of $1 million; the maintenance of  an adequate allowance for loan and lease losses; the enhanced management of the Bank’s liquidity position and funds management practices; the revision of the Bank’s contingency funding and strategic plans; and the  enhancement of the Bank’s anti-money laundering activities. The Written Agreement also imposed limitations on actions taken on criticized credits and credits classified as “loss”. The Written Agreement required the submission of capital plans and the maintenance of adequate capital and restricted the payment of dividends and other distributions, the redemption of stock and the incurrence of debt.

 

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NOTE 4 CAPITAL:

 

Capital Requirements and Ratios

 

The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), Tier 1 capital (as defined) to average assets (as defined), and Common Equity Tier 1 capital (as defined) to risk-weighted assets (as defined). As of June 30, 2016, the Bank meets all capital adequacy requirements to which it is subject.

 

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 continues to be subject to various capital requirements administered by banking agencies. The Bank’s actual capital amounts and ratios are presented in the following table as of June 30, 2016 and December 31, 2015, 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
June 30, 2016:
Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc. $ 67,951 16.95% $   32,069 8.0% $ 40,086 10.0%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.   62,920 15.70% 24,051 6.0%   32,069 8.0%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.   62,920 9.98% 25,212 4.0%   31,515 5.0%

Common Equity Tier 1 Capital

to Risk Weighted Assets:

New Peoples Bank, Inc.   62,920 15.70% 18,039 4.5%   26,056 6.5%
 

 

December 31, 2015:

Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc. $ 65,713 17.55% $               29,954 8.0% $ 37,443 10.0%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.   60,998 16.29% 22,466 6.0%   29,954 8.0%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.   60,998 9.67% 25,239 4.0%   31,549 5.0%

Common Equity Tier 1 Capital

to Risk Weighted Assets:

New Peoples Bank, Inc.   60,998 16.29% 16,849 4.5%   24,338 6.5%

 

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As of June 30, 2016, 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.

 

Beginning January 1, 2016, a capital conservation buffer of 0.625% became effective. 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 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
June 30, 2016
U.S. Government Agencies $ 28,133 $ 344 $ 52 $ 28,425
Taxable municipals 2,411 72 - 2,483
Corporate bonds 3,101 137 6 3,232
Mortgage backed securities 42,238 302 54 42,486
Total Securities AFS $ 75,883 $ 855 $ 112 $ 76,626
 
December 31, 2015
U.S. Government Agencies $ 41,488 $ 244 $ 209 $ 41,523
Taxable municipals 3,337 5 61 3,281
Corporate bonds 1,944 15 20 1,939
Mortgage backed securities 55,369 41 511 54,899
Total Securities AFS $ 102,138 $ 305 $ 801 $ 101,642

 

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 June 30, 2016 and December 31, 2015.

                           
    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

 
June 30, 2016                          
U.S. Government Agencies $ 4,747 $ 45 $ 1,849 $ 7 $ 6,596 $ 52  
Taxable municipals   -   -   276   -   276   -  
Corporate bonds   941   6   -   -   941   6  
Mtg. backed securities   2,607   15   6,276   39   8,883   54  
Total Securities AFS $ 8,295 $ 66 $ 8,401 $ 46 $ 16,696 $ 112  
                           
December 31, 2015                          
U.S. Government Agencies $ 14,995 $ 81 $ 7,708 $ 128 $ 22,073 $ 209  
Taxable municipals   2,136   57   278   4   2,414   61  
Corporate bonds   923   20   -   -   923   20  
Mtg. backed securities   38,945   354   8,719   157   47,664   511  
Total Securities AFS $ 56,999 $ 512 $ 16,705 $ 289 $ 73,074 $ 801  
                           

 

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At June 30, 2016, the available-for-sale portfolio included thirty eight investments for which the fair market value was less than amortized cost. At December 31, 2015, the available-for-sale portfolio included one hundred and thirty four investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had an other-than-temporary impairment.

 

Investment securities with a carrying value of $12.5 million and $15.4 million at June 30, 2016 and December 31, 2015, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

 

Gross proceeds on the sale of investment securities were $24.8 million and $7.1 million, respectively, for the six months ended June 30, 2016 and 2015. Gross realized gains and losses pertaining to the sale of investment securities available for sale are detailed as follows:

 

 

 

               
   

For the three months

ended June 30,

 

For the six months

ended June 30,

(Dollars are in thousands)   2016   2015   2016   2015
Gross gains realized $ 156 $ - $ 275 $ 62
Gross losses realized   (21)   -   (35)   (27)
Net realized gains $ 135 $ - $ 240 $ 35

 

The amortized cost and fair value of investment securities at June 30, 2016, 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 $ 1,232 $ 1,236   0.91%
Due after one year through five years 742 743 1.79%
Due after five years through ten years   13,068   13,287   2.46%
Due after ten years   60,841   61,360   1.85%
Total $ 75,883 $ 76,626   1.94%

 

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.6 million and $2.4 million as of June 30, 2016 and December 31, 2015, respectively.

 

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NOTE 6 LOANS:

 

Loans receivable outstanding are summarized as follows:

 

 

 

       
(Dollars are in thousands)   June 30, 2016   December 31, 2015
Real estate secured:        
Commercial $ 103,531 $ 98,569
Construction and land development   19,289   14,672
Residential 1-4 family   246,084   242,916
Multifamily   13,273   12,954
Farmland   23,474   22,174
Total real estate loans   405,651   391,285
Commercial   24,863   21,469
Agriculture   4,346   3,793
Consumer installment loans   24,724   24,568
All other loans   29   54
Total loans $ 459,613 $ 441,169

 

Loans receivable on nonaccrual status are summarized as follows:

         
         
(Dollars are in thousands)   June 30, 2016   December 31, 2015
Real estate secured:        
Commercial $ 2,851 $ 4,358
Construction and land development   424   436
Residential 1-4 family   7,685   8,338
Multifamily   270   430
Farmland   969   1,170
Total real estate loans   12,199   14,732
Commercial   75   65
Agriculture   178   9
Consumer installment loans   69   41
All other loans   -   -
Total loans receivable on nonaccrual status $ 12,521 $ 14,847

 

Total interest income not recognized on nonaccrual loans for the six months ended June 30, 2016 and 2015 was $158 thousand and $238 thousand, respectively.

 

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The following table presents information concerning the Company’s investment in loans considered impaired as of June 30, 2016 and December 31, 2015:

 

                

 

 

As of June 30, 2016

(Dollars are in thousands)

  Average
Recorded
Investment
  Interest
Income
Recognized
  Recorded
Investment
  Unpaid Principal Balance  Related
Allowance
With no related allowance recorded:                         
Real estate secured:                         
Commercial  $4,451   $73   $4,396   $4,818   $—   
Construction and land development   116    —      7    7    —   
Residential 1-4 family   3,758    103    4,075    4,391    —   
Multifamily   282    11    308    349    —   
Farmland   4,162    102    4,189    4,869    —   
Commercial   —      —      —      —      —   
Agriculture   33    2    26    26    —   
Consumer installment loans   32    2    43    43    —   
All other loans   —      —      —      —      —   
With an allowance recorded:                         
Real estate secured:                         
Commercial   1,522    —      1,029    1,102    158 
Construction and land development   277    —      265    485    131 
Residential 1-4 family   1,037    11    568    574    69 
Multifamily   133    4    165    165    30 
Farmland   595    12    505    513    296 
Commercial   72    2    68    68    23 
Agriculture   139    (2)   185    185    185 
Consumer installment loans   22    —      10    10    3 
All other loans   —      —      —      —      —   
Total  $16,631   $320   $15,839   $17,605   $895 

 

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16

 
 

 

 

As of December 31, 2015

(Dollars are in thousands)

   

 

Average

Recorded

Investment

    

 

Interest

Income

Recognized

    

 

 

Recorded

Investment

    

 

Unpaid Principal Balance

    

 

 

Related

Allowance

 
With no related allowance recorded:                         
Real estate secured:                         
Commercial  $4,534   $163   $4,212   $5,173   $—   
Construction and land development   12    1    10    10    —   
Residential 1-4 family   3,506    161    3,037    3,150    —   
Multifamily   520    9    430    471    —   
Farmland   5,073    213    3,983    4,620    —   
Commercial   267    —      —      —      —   
Agriculture   42    4    36    36    —   
Consumer installment loans   31    1    11    11    —   
All other loans   —      —      —      —      —   
With an allowance recorded:                         
Real estate secured:                         
Commercial   2,935    37    2,503    2,849    288 
Construction and land development   373    —      289    499    155 
Residential 1-4 family   2,219    99    1,920    2,121    168 
Multifamily   23    —      —      —      —   
Farmland   906    38    761    778    328 
Commercial   80    3    69    69    24 
Agriculture   24    2    18    18    18 
Consumer installment loans   19    4    45    45    2 
All other loans   —      —      —      —      —   
Total  $20,564   $735   $17,324   $19,850   $983 

 

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17

 
 

 

An age analysis of past due loans receivable was as follows:

                      

 

 

 

 

 

As of June 30, 2016

(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
  Accruing
Loans
90 or
More
Days
Past
Due
Real estate secured:                                   
Commercial  $534   $1,255   $1,552   $3,341   $100,190   $103,531   $—   
Construction and land
development
   100    —      71    171    19,118    19,289    —   
Residential 1-4 family   6,199    2,054    2,075    10,328    235,756    246,084    —   
Multifamily   446    67    165    678    12,595    13,273    —   
Farmland   365    164    —      529    22,945    23,474    —   
Total real estate loans   7,644    3,540    3,863    15,047    390,604    405,651    —   
Commercial   36    15    75    126    24,737    24,863    —   
Agriculture   29    —      173    202    4,144    4,346    —   
Consumer installment
Loans
   161    49    37    247    24,477    24,724    —   
All other loans   22    —      —      22    7    29    —   
Total loans  $7,892   $3,604   $4,148   $15,644   $443,969   $459,613   $—   

 

 

 

 

 

 

As of December 31, 2015

(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
  Accruing
Loans
90 or
More
Days
Past
Due
Real estate secured:                                   
Commercial  $311   $105   $2,534   $2,950   $95,619   $98,569   $—   
Construction and land
development
   144    —      17    161    14,511    14,672    —   
Residential 1-4 family   4,694    1,487    2,891    9,072    233,844    242,916    —   
Multifamily   47    —      320    367    12,587    12,954    —   
Farmland   363    —      251    614    21,560    22,174    —   
Total real estate loans   5,559    1,592    6,013    13,164    378,121    391,285    —   
Commercial   18    1    64    83    21,386    21,469    —   
Agriculture   —      —      —      —      3,793    3,793    —   
Consumer installment
Loans
   113    1    27    141    24,427    24,568    —   
All other loans   6    —      —      6    48    54    —   
Total loans  $5,696   $1,594   $6,104   $13,394   $427,775   $441,169   $—   

 

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:

 

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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 June 30, 2016

(Dollars are in thousands)

  Pass  Special
Mention
  Substandard  Doubtful  Total
Real estate secured:                         
   Commercial  $91,667   $7,378   $4,486   $—     $103,531 
   Construction and land development   17,267    1,598    424    —      19,289 
   Residential 1-4 family   235,604    1,843    8,637    —      246,084 
   Multifamily   12,730    —      543    —      13,273 
   Farmland   17,703    3,473    2,298    —      23,474 
Total real estate loans   374,971    14,292    16,388    —      405,651 
Commercial   24,070    706    87    —      24,863 
Agriculture   4,157    —      189    —      4,346 
Consumer installment loans   24,574    —      150    —      24,724 
All other loans   29    —      —      —      29 
Total  $427,801   $14,998   $16,814   $—     $459,613 

 

As of December 31, 2015

(Dollars are in thousands)

   

 

 

Pass

    

 

Special

Mention

    

 

 

Substandard

    

 

 

Doubtful

    

 

 

Total

 
Real estate secured:                         
   Commercial  $85,255   $7,543   $5,771   $—     $98,569 
   Construction and land development   12,262    1,974    436    —      14,672 
   Residential 1-4 family   229,182    3,572    10,162    —      242,916 
   Multifamily   12,264    187    503    —      12,954 
   Farmland   16,663    2,923    2,588    —      22,174 
Total real estate loans   355,626    16,199    19,460    —      391,285 
Commercial   20,641    724    104    —      21,469 
Agriculture   3,767    —      26    —      3,793 
Consumer installment loans   24,478    —      90    —      24,568 
All other loans   54    —      —      —      54 
Total  $404,566   $16,923    19,680   $—     $441,169 

 

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NOTE 7 ALLOWANCE FOR LOAN LOSSES:

 

The following table details activity in the allowance for loan losses by portfolio segment for the period ended June 30, 2016. 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 June 30, 2016

(Dollars are in thousands)

  Beginning
Balance
  Charge
Offs
  Recoveries  Advances  Provisions  Ending Balance
Real estate secured:                              
Commercial  $2,384   $(327)  $185   $—     $(320)  $1,922 
Construction and land development   332    (5)   18    —      (18)   327 
Residential 1-4 family   2,437    (411)   65    —      96    2,187 
Multifamily   232    (10)   —      —      36    258 
Farmland   675    (2)   101    —      (139)   635 
Total real estate loans   6,060    (755)   369    —      (345)   5,329 
Commercial   266    (5)   48    —      (110)   199 
Agriculture   124    —      4    —      91    219 
Consumer installment loans   128    (18)   13    —      (3)   120 
All other loans   1    —      —      —      (1)   —   
Unallocated   914    —      —      —      (132)   782 
Total  $7,493   $(778)  $434   $—     $(500)  $6,649 

 

                   
    Allowance for Loan Losses              Recorded Investment in Loans           

 

 

As of June 30, 2016

(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  $158   $1,764   $1,922   $5,425   $98,106   $103,531 
Construction and land
development
   131    196    327    272    19,017    19,289 
Residential 1-4 family   69    2,118    2,187    4,643    241,441    246,084 
Multifamily   30    228    258    473    12,800    13,273 
Farmland   296    339    635    4,694    18,780    23,474 
Total real estate loans   684    4,645    5,329    15,507    390,144    405,651 
Commercial   23    176    199    68    24,795    24,863 
Agriculture   185    34    219    211    4,135    4,346 
Consumer installment loans   3    117    120    53    24,671    24,724 
All other loans   —      —      —      —      29    29 
Unallocated   —      782    782    —      —      —   
Total  $895   $5,754   $6,649   $15,839   $443,774   $459,613 

 

 

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The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2015. 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, 2015

(Dollars are in thousands)

  Beginning
Balance
  Charge
Offs
  Recoveries  Advances  Provisions  Ending Balance
Real estate secured:                              
Commercial  $4,418   $(724)  $147   $—     $(1,457)  $2,384 
Construction and land development   199    (226)   215    —      144    332 
Residential 1-4 family   2,572    (743)   93    —      515    2,437 
Multifamily   154    (384)   6    —      456    232 
Farmland   913    (90)   214    —      (362)   675 
Total real estate loans   8,256    (2,167)   675    —      (704)   6,060 
Commercial   457    (92)   1,412    —      (1,511)   266 
Agriculture   125    —      3    —      (4)   124 
Consumer installment loans   171    (101)   41    —      17    128 
All other loans   1    —      —      —      —      1 
Unallocated   912    —      —      —      2    914 
Total  $9,922   $(2,360)  $2,131   $—     $(2,200)  $7,493 

 

                   
    Allowance for Loan Losses              Recorded Investment in Loans           

 

 

As of December 31, 2015

(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  $288   $2,096   $2,384   $6,715   $91,854   $98,569 
Construction and land
development
   155    177    332    299    14,373    14,672 
Residential 1-4 family   168    2,269    2,437    4,957    237,959    242,916 
Multifamily   —      232    232    430    12,524    12,954 
Farmland   328    347    675    4,744    17,430    22,174 
Total real estate loans   939    5,121    6,060    17,145    374,140    391,285 
Commercial   24    242    266    69    21,400    21,469 
Agriculture   18    106    124    54    3,739    3,793 
Consumer installment loans   2    126    128    56    24,512    24,568 
All other loans   —      1    1    —      54    54 
Unallocated   —      914    914    —      —      —   
Total  $983   $6,510    7,493   $17,324   $423,845   $441,169 

 

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.

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NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

 

At June 30, 2016 there were $9.7 million in loans that are classified as troubled debt restructurings compared to $9.5 million at December 31, 2015. The following table presents information related to loans modified as troubled debt restructurings during the six and three months ended June 30, 2016 and 2015.

                   
                   
   For the six months ended
June 30, 2016
  For the six months ended
June 30, 2015
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
   —      —      —      1    551    314 
   Residential 1-4 family   —      —      —      —      —      —   
   Multifamily   —      —      —      —      —      —   
   Farmland   1    291    291    —      —      —   
      Total real estate loans   2    632    630    1    551    314 
Commercial   —      —      —      —      —      —   
Agriculture   —      —      —      —      —      —   
Consumer installment loans   —      —      —      —      —      —   
All other loans   —      —      —      —      —      —   
Total   2   $632   $630    1   $551   $314 
                               
    

For the three months ended

June 30, 2016

              

For the three months ended

June 30, 2015

           
 Troubled Debt Restructurings
(Dollars are in thousands)
   

 

# of Loans

    Pre-Mod. Recorded Investment    

Post-Mod.

Recorded

Investment

    

 

# of

Loans

    

Pre-Mod.

Recorded Investment

    

Post-Mod.

Recorded

Investment

 
Real estate secured:                              
   Commercial   —     $—     $—      —     $—     $—   
Construction and land
Development
   —      —      —      —      —      —   
   Residential 1-4 family   —      —      —      —      —      —   
   Multifamily   —      —      —      —      —      —   
   Farmland   1    291    291    —      —      —   
      Total real estate loans   1    291    291    —      —      —   
Commercial   —      —      —      —      —      —   
Agriculture   —      —      —      —      —      —   
Consumer installment loans   —      —      —      —      —      —   
All other loans   —      —      —      —      —      —   
Total   1   $291   $291    —     $—     $—   
                               
                               

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During the six months ended June 30, 2016, the Company modified the terms of two loans for which the modification was considered to be a troubled debt restructuring. On one loan the interest rate and maturity date were not modified; however, the payment terms were changed. On one loan the interest rate was lowered and the payment terms and maturity date were changed. During the six months ended June 30, 2015, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate was not modified on the loan; however, the maturity date was extended.

 

During the three months ended June 30, 2016, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate was lowered and the payment terms and maturity date were changed. During the three months ended June 30, 2015, the Company modified no loans that were considered to be troubled debt restructurings.

 

There was one commercial real estate loan with a recorded investment of $308 thousand that had been modified as a troubled debt restructuring that defaulted during the six months ended June 30, 2016, which was within twelve months of the loan’s modification date. No loans modified as troubled debt restructurings defaulted during the six months ended June 30, 2015. There were no loans modified as troubled debt restructurings that defaulted during the three months ended June 30, 2016 and 2015, which were within twelve months of their modification date. 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 six months ended June 30, 2016 and the year ended December 31, 2015:

 

(Dollars are in thousands)  June 30,
2016
  December 31, 2015
Balance, beginning of period  $12,398   $15,049 
Additions   3,098    3,277 
Purchases of other real estate owned   —      12 
Transfers of other real estate owned   (125)   —   
Donation of other real estate owned   —      (33)
Proceeds from sales   (947)   (1,831)
Loans made to finance sales   (503)   (878)
Proceeds from insurance claims   —      (101)
Adjustment of carrying value   28    (3,246)
Deferred gain from sales   —      50 
Gain from sales   185    99 
Balance, end of period  $14,134   $12,398 

 

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NOTE 10 EARNINGS PER SHARE:

 

Basic earnings per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options and common stock warrants are determined by the Treasury method. For the three and six months ended June 30, 2016 and 2015, potential common shares of 882,353 and 1,539,877, respectively, 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 June 30,
  For the six months
ended June 30,
   2016  2015  2016  2015
Net income  $882   $462   $1,580   $1,084 
Weighted average shares outstanding   23,354,082    22,878,654    23,354,082    22,878,654 
Dilutive shares for stock options and warrants   —      —      —      —   
Weighted average dilutive shares outstanding   23,354,082    22,878,654    23,354,082    22,878,654 
                     
Basic income per share  $0.04   $0.02   $0.07   $0.05 
Diluted income per share  $0.04   $0.02   $0.07   $0.05 

 

NOTE 11 TRUST PREFERRED SECURITIES AND DEFERRAL OF INTEREST PAYMENTS:

 

On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I. The proceeds of the funds were used for general corporate purposes which included capital management for affiliates, retirement of indebtedness and other investments. The securities have a floating rate of 3 month LIBOR plus 260 basis points, which resets quarterly, with a current rate at June 30, 2016 of 3.23%.

 

On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2. The proceeds of the funds were used for general corporate purposes, which include capital management for affiliates and the acquisition of two branch banks. The securities have a floating rate of 3 month LIBOR plus 177 basis points, which resets quarterly, with a current rate at June 30, 2016 of 2.40%.

 

Under the terms of the subordinated debt transactions, the securities mature in 30 years from the date of issuance and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. Due to the ability to defer interest and principal payments for 60 months without being considered in default, the regulatory agencies consider the trust preferred securities as Tier 1 capital up to certain limits.

 

In October 2009, a restriction to pay dividends from the Bank to the Company was issued by the Federal Reserve Bank of Richmond. In July 2010 the Company and the Bank entered into the Written Agreement discussed in Note 3. The Written Agreement prohibited the payment of interest on the trust preferred securities without prior regulatory approval. As a result, interest on trust preferred securities was deferred. This deferral was for a period of 60 months, and was set to expire on January 7, 2015. In the fourth quarter of 2014, the Company requested and received regulatory approval to pay the cumulative deferred interest on the trust preferred securities due on January 7, 2015 totaling $2.5 million, which the Company paid on December 10, 2014. As a result of this payment there has been no interest in arrears on the trust preferred securities since that date.

 

The Company is currently not deferring the quarterly interest payments on the trust preferred securities. However, as discussed above, regulatory approval was needed to pay the interest while the Company was under the formal Written Agreement. In March 2015 the Company requested and received regulatory approval to pay the $107 thousand in interest on the trust preferred securities due on April 7, 2015, which the Company paid on April 3, 2015. In June 2015 the Company requested and received regulatory approval to pay the $109 thousand in interest on the trust preferred securities due on July 7, 2015, which the Company paid on July 2, 2015. In September 2015 the Company requested and received regulatory approval to pay the $111 thousand in interest on the trust preferred securities due on October 7, 2015, which the Company paid on October 5, 2015. In December 2015 the Company requested and received regulatory approval to pay the $112 thousand in interest on the trust preferred securities due on January 7, 2016, which the Company paid on January 5, 2016.

 

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24

 
 

The restriction requiring regulatory approval before the payment of interest on the trust preferred securities was lifted when the Written Agreement was terminated effective January 20, 2016. On April 4, 2016, the Company paid $124 thousand in interest on the trust preferred securities, which was due on April 7, 2016. On July 6, 2016 the Company paid $124 thousand in interest on the trust preferred securities, which was due on July 7, 2016.

 

NOTE 12 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 establish 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. The Company’s available-for-sale securities, totaling $76.6 million and $101.6 million at June 30, 2016 and December 31, 2015, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

 

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. The aggregate carrying amounts of impaired loans carried at fair value were $14.9 million and $16.3 million at June 30, 2016 and December 31, 2015, respectively.

 

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25

 
 

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. The aggregate carrying amounts of foreclosed assets were $14.1 million and $12.4 million at June 30, 2016 and December 31, 2015, respectively.

 

Assets and liabilities measured at fair value are as follows as of June 30, 2016 (for purpose of this table the impaired loans are shown net of the related allowance):

          
(Dollars are in thousands)  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
               
    U.S. Government Agencies  $—     $28,425   $—   
    Taxable municipals   —      2,483    —   
    Corporate bonds   —      3,232    —   
    Mortgage backed securities   —      42,486    —   
                
(On a non-recurring basis)
Other real estate owned
   —      —      14,134 
Impaired loans:               
  Real estate secured:               
      Commercial   —      —      5,267 
      Construction and land development   —      —      141 
      Residential 1-4 family   —      —      4,574 
      Multifamily   —      —      443 
      Farmland   —      —      4,398 
  Commercial   —      —      45 
  Agriculture   —      —      26 
  Consumer installment loans   —      —      50 
  All other loans   —      —      —   
Total  $—     $76,626   $29,078 

 

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26

 
 

Assets and liabilities measured at fair value are as follows as of December 31, 2015 (for purpose of this table the impaired loans are shown net of the related allowance):

          
(Dollars are in thousands)  Quoted market price in active markets
(Level 1)
  Significant other observable inputs
(Level 2)
  Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available-for-sale investments
               
    U.S. Government Agencies  $—     $41,523   $—   
    Taxable municipals   —      3,281    —   
    Corporate bonds   —      1,939    —   
    Mortgage backed securities   —      54,899    —   
                
(On a non-recurring basis)
Other real estate owned
   —      —      12,398 
Impaired loans:               
  Real estate secured:               
      Commercial   —      —      6,427 
      Construction and land development   —      —      144 
      Residential 1-4 family   —      —      4,789 
      Multifamily   —      —      430 
      Farmland   —      —      4,416 
  Commercial   —      —      45 
  Agriculture   —      —      36 
  Consumer installment loans   —      —      54 
  All other loans   —      —      —   
Total  $—     $101,642   $28,739 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)  Fair Value at June 30,
2016
  Valuation Technique  Significant Unobservable Inputs  General Range of Significant Unobservable Input Values
               
Impaired Loans  $14,944   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  $14,134   Appraised Value/Comparable Sales/Other Estimates from Independent Sources  Discounts to reflect current market conditions and estimated costs to sell  0 – 18%

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Fair Value of Financial Instruments

 

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

 

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2016 and December 31, 2015. 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, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. 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 as of June 30, 2016 and December 31, 2015.

 

                
         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)
                
June 30, 2016                         
Financial Instruments – Assets                         
   Net Loans  $452,964   $455,841   $—     $440,897   $14,944 
                          
Financial Instruments – Liabilities                         
   Time Deposits   251,598    251,587    —      251,587    —   
   FHLB Advances   9,358    9,355    —      9,355    —   
                          
December 31, 2015                         
Financial Instruments – Assets                         
   Net Loans  $433,676   $438,589   $—     $422,248   $16,341 
                          
Financial Instruments – Liabilities                         
   Time Deposits   256,978    256,797    —      256,797    —   
   FHLB Advances   2,958    2,958    —      2,958    —   

 

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NOTE 13 SUBSEQUENT EVENTS:

 

In July 2016, the Bank and its wholly-owned subsidiary NPB Insurance Services, Inc. announced by press release it is teaming up with The Hilb Group of Virginia dba CSE Insurance Services, a division of the Hilb Group, LLC (“CSE”), located in Abingdon, Virginia, to provide insurance services for its current and future customers. Effective July 1, 2016, NPB Insurance Services, Inc. sold its existing book of business to CSE. These customers will be serviced by CSE and the Bank will refer future insurance needs of its bank customers to CSE.

 

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 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company applied the guidance prospectively. Adoption of these amendments did not have a material effect on the Company’s financial statements.

 

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. Adoption of these amendments did not have a material effect on the Company’s financial statements.

 

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (“ASC”), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Adoption of these amendments did not have a material effect on the Company’s financial statements.

 

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In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In August 2015, the FASB issued amendments to the Interest topic of the ASC to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. Adoption of these amendments did not have a material effect on the Company’s financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

 

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. 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 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 amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

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 will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.

 

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In Ju