NEW PEOPLES BANKSHARES INC - Quarter Report: 2015 September (Form 10-Q)

NEW PEOPLES BANKSHARES INC - Quarter Report: 2015 September (Form 10-Q)

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Form 10-Q

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 September 30, 2015

¨	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		31-1804543
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

67 Commerce Drive Honaker, Virginia		24260
(Address of principal executive offices)		(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):

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 November 12, 2015
Common Stock, $2.00 par value		23,337,540

NEW PEOPLES BANKSHARES, INC.

INDEX


		Page

PART I	FINANCIAL INFORMATION		2

Item 1.	Financial Statements		2

	Consolidated Statements of Income – Nine Months Ended September 30, 2015 and 2014 (Unaudited)		2

	Consolidated Statements of Income – Three Months Ended September 30, 2015 and 2014 (Unaudited)		3

	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)		4

	Consolidated Balance Sheets – September 30, 2015 (Unaudited) and December 31, 2014		5

	Consolidated Statements of Changes in Stockholders’ Equity - Nine Months Ended September 30, 2015 and 2014 (Unaudited)		6

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2015 and 2014 (Unaudited)		7

	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

Item 4.	Controls and Procedures		33

PART II	OTHER INFORMATION		34

Item 1.	Legal Proceedings		34

Item 1A.	Risk Factors		34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3.	Defaults upon Senior Securities		34

Item 4.	Mine Safety Disclosures		34

Item 5.	Other Information		34

Item 6.	Exhibits		34

SIGNATURES			35

Part I

Financial Information

Item 1

Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	2015			2014
INTEREST AND DIVIDEND INCOME
Loans including fees	$	17,595		$	18,814
Federal funds sold		2			2
Interest-earning deposits with banks		73			122
Investments		1,306			1,056
Dividends on equity securities (restricted)		98			96

Total Interest and Dividend Income		19,074			20,090


INTEREST EXPENSE
Deposits
Demand		28			28
Savings		129			140
Time deposits below $100,000		1,062			1,415
Time deposits above $100,000		735			974
FHLB Advances		113			150
Trust Preferred Securities		328			349

Total Interest Expense		2,395			3,056


NET INTEREST INCOME		16,679			17,034

PROVISION FOR LOAN LOSSES		(1,200	)		—


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		17,879			17,034


NONINTEREST INCOME
Service charges		1,667			1,638
Fees, commissions and other income		2,333			2,539
Insurance and investment fees		411			290
Net realized gains on sale of investment securities		35			3
Life insurance investment income		316			55

Total Noninterest Income		4,762			4,525


NONINTEREST EXPENSES
Salaries and employee benefits		8,816			9,610
Occupancy and equipment expense		2,767			2,908
Advertising and public relations		240			329
Data processing and telecommunications		1,552			1,672
FDIC insurance premiums		652			1,124
Other real estate owned and repossessed vehicles, net		1,398			1,930
Other operating expenses		3,822			3,831

Total Noninterest Expenses		19,247			21,404


INCOME BEFORE INCOME TAXES		3,394			155

INCOME TAX EXPENSE (BENEFIT)		17			(9	)


NET INCOME	$	3,377		$	164


Income Per Share
Basic	$	0.15		$	0.01

Fully Diluted	$	0.15		$	0.01


Weighted Average Shares of Common Stock
Basic		22,878,654			21,872,293

Fully Diluted		22,878,654			21,872,293

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	2015			2014
INTEREST AND DIVIDEND INCOME
Loans including fees	$	5,889		$	6,186
Federal funds sold		—			1
Interest-earning deposits with banks		18			37
Investments		457			366
Dividends on equity securities (restricted)		32			33

Total Interest and Dividend Income		6,396			6,623


INTEREST EXPENSE
Deposits
Demand		10			9
Savings		44			42
Time deposits below $100,000		315			449
Time deposits above $100,000		213			312
FHLB Advances		35			47
Trust Preferred Securities		111			120

Total Interest Expense		728			979


NET INTEREST INCOME		5,668			5,644

PROVISION FOR LOAN LOSSES		(1,200	)		—


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,868			5,644


NONINTEREST INCOME
Service charges		579			580
Fees, commissions and other income		796			905
Insurance and investment fees		155			107
Net realized gains on sale of investment securities		—			(1	)
Life insurance investment income		247			19

Total Noninterest Income		1,777			1,610


NONINTEREST EXPENSES
Salaries and employee benefits		2,992			3,201
Occupancy and equipment expense		905			939
Advertising and public relations		111			91
Data processing and telecommunications		550			563
FDIC insurance premiums		213			374
Other real estate owned and repossessed vehicles, net		332			402
Other operating expenses		1,235			1,295

Total Noninterest Expenses		6,338			6,865


INCOME BEFORE INCOME TAXES		2,307			389

INCOME TAX EXPENSE (BENEFIT)		14			(4	)


NET INCOME	$	2,293		$	393


Income Per Share
Basic	$	0.10		$	0.02

Fully Diluted	$	0.10		$	0.02


Weighted Average Shares of Common Stock
Basic		22,878,654			21,872,293

Fully Diluted		22,878,654			21,872,293

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(IN THOUSANDS)

(UNAUDITED)


	For the three months ended September 30,						For the nine months ended September 30,
	2015			2014			2015			2014

NET INCOME	$	2,293		$	393		$	3,377		$	164

Other comprehensive income:
Investment Securities Activity
Unrealized gains arising during the period		576			62			309			825
Tax related to unrealized gains		(196	)		(21	)		(105	)		(280	)
Reclassification of realized (gains) losses during the period		—			1			(35	)		(3	)
Tax related to realized (gains) losses		—			(1	)		12			1

TOTAL OTHER COMPREHENSIVE INCOME		380			41			181			543

TOTAL COMPREHENSIVE INCOME	$	2,673		$	434		$	3,558		$	707

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)


	September 30, 2015			December 31, 2014
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	16,576		$	14,622
Interest-bearing deposits with banks		17,783			20,933
Federal funds sold		—			5

Total Cash and Cash Equivalents		34,359			35,560

Investment securities available-for-sale		102,383			100,069

Loans receivable		438,538			457,549
Allowance for loan losses		(8,672	)		(9,922	)

Net Loans		429,866			447,627

Bank premises and equipment, net		28,406			28,766
Equity securities (restricted)		2,441			2,369
Other real estate owned		15,195			15,049
Accrued interest receivable		1,835			1,975
Life insurance investments		12,075			12,268
Deferred taxes, net		4,895			4,988
Other assets		2,303			2,413


Total Assets	$	633,758		$	651,084


LIABILITIES

Deposits:
Demand deposits:
Noninterest bearing	$	143,194		$	143,950
Interest-bearing		32,387			29,567
Savings deposits		122,830			111,701
Time deposits		266,212			299,974

Total Deposits		564,623			585,192

Federal Home Loan Bank advances		3,258			4,158
Accrued interest payable		301			266
Accrued expenses and other liabilities		2,671			2,121
Trust preferred securities		16,496			16,496


Total Liabilities		587,349			608,233


STOCKHOLDERS’ EQUITY

Common stock - $2.00 par value; 50,000,000 shares authorized; 22,878,654 shares issued and outstanding		45,757			45,757
Common stock warrants		1,176			1,176
Additional paid-in-capital		13,672			13,672
Retained deficit		(14,308	)		(17,685	)
Accumulated other comprehensive income (loss)		112			(69	)


Total Stockholders’ Equity		46,409			42,851


Total Liabilities and Stockholders’ Equity	$	633,758		$	651,084

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)


	Shares of Common Stock		Common Stock		Common Stock Warrants		Additional Paid-in- Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity

Balance, December 31, 2013		21,872	$	43,745	$	2,050	$	13,050	$	(17,925	)	$	(960	)	$	39,960

Net income		—		—		—		—		164			—			164

Other comprehensive income, net of tax		—		—		—		—		—			543			543

Balance, September 30, 2014		21,872	$	43,745	$	2,050	$	13,050	$	(17,761	)	$	(417	)	$	40,667


Balance, December 31, 2014		22,878	$	45,757	$	1,176	$	13,672	$	(17,685	)	$	(69	)	$	42,851

Net income		—		—		—		—		3,377			—			3,377

Other comprehensive income, net of tax		—		—		—		—		—			181			181

Balance, September 30, 2015		22,878	$	45,757	$	1,176	$	13,672	$	(14,308	)	$	112		$	46,409

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(IN THOUSANDS)

(UNAUDITED)


	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,377		$	164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,571			1,673
Provision for loan losses		(1,200	)		—
Income on life insurance		(381	)		(120	)
Gain on sale of securities available-for-sale		(35	)		(3	)
Gain on sale of premises and equipment		(67	)		(183	)
(Gain) Loss on sale of foreclosed assets		(10	)		183
Net write-down of carrying value of foreclosed real estate		784			957
Accretion of bond premiums/discounts		867			780
Amortization of core deposit intangible		—			8
Net change in:
Interest receivable		140			264
Other assets		110			118
Accrued interest payable		35			297
Accrued expenses and other liabilities		550			784

Net Cash Provided by Operating Activities		5,741			4,922


CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans		15,686			22,558
Proceeds from sale of loans		—			2,905
Purchase of securities available-for-sale		(25,202	)		(43,534	)
Proceeds from sale and maturities of securities available-for-sale		22,330			25,642
Sale of Federal Home Loan Bank stock		30			350
Purchase of Federal Reserve Bank stock		(37	)		—
Purchase of CBB Financial Corp. stock		(65	)		—
Payments for the purchase of premises and equipment		(1,325	)		(1,426	)
Payments for the purchase of other real estate owned		(5	)		—
Proceeds from life insurance investment		1,793			—
Proceeds from sales of premises and equipment		181			553
Proceeds from insurance on other real estate owned		57			—
Proceeds from sales of other real estate owned		1,084			2,164

Net Cash Provided by Investing Activities		14,527			9,212


CASH FLOWS FROM FINANCING ACTIVITIES
Repayments to Federal Home Loan Bank		(900	)		(900	)
Net change in:
Demand deposits		2,064			8,547
Savings deposits		11,129			8,156
Time deposits		(33,762	)		(32,853	)

Net Cash Used in Financing Activities		(21,469	)		(17,050	)


Net decrease in cash and cash equivalents		(1,201	)		(2,916	)
Cash and Cash Equivalents, Beginning of Period		35,560			54,680

Cash and Cash Equivalents, End of Period	$	34,359		$	51,764


Supplemental Disclosure of Cash Paid During the Period for:
Interest	$	2,360		$	2,759
Taxes	$	—		$	—

Supplemental Disclosure of Non Cash Transactions:
Other real estate acquired in settlement of foreclosed loans	$	2,249		$	2,224
Loans made to finance sale of foreclosed real estate	$	193		$	1,232

The accompanying notes are an integral part of this statement.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

NATURE OF OPERATIONS:

New Peoples Bankshares, Inc. (“The Company”) is a bank 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. NPB Web Services, Inc. is currently inactive.

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 September 30, 2015 and December 31, 2014, and the results of operations for the three and nine month periods ended September 30, 2015 and 2014. 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, 2014. The results of operations for the three and nine month periods ended September 30, 2015 and 2014 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:

Effective July 29, 2010, the Company and the Bank entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“Reserve Bank”) and the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”). At September 30, 2015, we believe we are compliant with the Written Agreement. All of the written plans required to date, as discussed in the following paragraphs, have been submitted on a timely basis.

Under the terms of the Written Agreement, the Bank agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Written Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the Reserve Bank.

Under the terms of the Written Agreement, both the Company and the Bank agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Written Agreement, the Company and the Bank appointed a committee to monitor compliance with the Written Agreement. The directors of the Company and the Bank recognized and unanimously agree with the common goal of financial soundness represented by the Written Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

NOTE 4

CAPITAL:

Capital Requirements and Ratios

The Company and the Bank are 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 Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and 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. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and 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). Management believes that, as of September 30, 2015, the Company and the Bank meet all capital adequacy requirements to which they are subject. The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table as of September 30, 2015 and December 31, 2014, respectively. The September 30, 2015 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
September 30, 2015:
Total Capital to Risk Weighted Assets:
The Company	$	66,762		17.83	%	$	29,961		8.0	%	$	N/A		N/A
The Bank		66,326		17.71	%		29,965		8.0	%		37,456		10.0	%
Tier 1 Capital to Risk Weighted Assets:
The Company		61,464		16.41	%		22,471		6.0	%		N/A		N/A
The Bank		61,595		16.44	%		22,474		6.0	%		29,965		8.0	%
Tier 1 Capital to Average Assets:
The Company		61,464		9.64	%		25,515		4.0	%		N/A		N/A
The Bank		61,595		9.66	%		25,512		4.0	%		31,890		5.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
The Company		46,032		12.29	%		16,853		4.5	%		N/A		N/A
The Bank		61,595		16.44	%		16,855		4.5	%		24,346		6.5	%

December 31, 2014:
Total Capital to Risk Weighted Assets:
The Company	$	59,816		15.98	%	$	29,948		8.0	%	$	N/A		N/A
The Bank		58,869		15.73	%		29,938		8.0	%		37,422		10.0	%
Tier 1 Capital to Risk Weighted Assets:
The Company		53,379		14.26	%		14,974		4.0	%		N/A		N/A
The Bank		54,127		14.46	%		14,969		4.0	%		22,453		6.0	%
Tier 1 Capital to Average Assets:
The Company		53,379		8.07	%		26,453		4.0	%		N/A		N/A
The Bank		54,127		8.19	%		26,447		4.0	%		33,058		5.0	%

As of September 30, 2015, 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 Company’s and Bank’s category.

NOTE 5

INVESTMENT SECURITIES:

The amortized cost and estimated fair value of securities (all available-for-sale (“AFS”)) are as follows:


(Dollars are in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
September 30, 2015
U.S. Government Agencies	$	41,639	$	324	$	155	$	41,808
Taxable municipals		3,352		8		44		3,316
Corporate bonds		942		5		—		947
Mortgage backed securities		56,281		235		204		56,312

Total Securities AFS	$	102,214	$	572	$	403	$	102,383


December 31, 2014
U.S. Government Agencies	$	43,985	$	332	$	247	$	44,070
Taxable municipals		293		—		5		288
Corporate bonds		—		—		—		—
Mortgage backed securities		55,896		144		329		55,711

Total Securities AFS	$	100,174	$	476	$	581	$	100,069

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 September 30, 2015 and December 31, 2014.


	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
September 30, 2015
U.S. Government Agencies	$	8,808	$	44	$	8,134	$	111	$	16,942	$	155
Taxable municipals		2,161		41		281		3		2,442		44
Corporate bonds		—		—		—		—		—		—
Mtg. backed securities		20,105		109		7,940		95		28,045		204

Total Securities AFS	$	31,074	$	194	$	16,355	$	209	$	47,429	$	403


December 31, 2014
U.S. Government Agencies	$	7,408	$	38	$	12,965	$	209	$	20,373	$	247
Taxable municipals		288		5		—		—		288		5
Mtg. backed securities		21,083		179		11,622		150		32,705		329

Total Securities AFS	$	28,779	$	222	$	24,587	$	359	$	53,366	$	581

At September 30, 2015, the available-for-sale portfolio included eighty eight investments for which the fair market value was less than amortized cost. At December 31, 2014, the available-for-sale portfolio included eighty 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.

The amortized cost and fair value of investment securities at September 30, 2015, 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.


(Dollars are in thousands) Securities Available-for-Sale	Amortized Cost		Fair Value		Weighted Average Yield
Due in one year or less	$	116	$	116		0.10	%
Due after one year through five years		3,299		3,315		1.15	%
Due after five years through ten years		12,854		12,855		1.66	%
Due after ten years		85,945		86,097		1.91	%

Total	$	102,214	$	102,383		1.85	%

Investment securities with a carrying value of $14.7 million and $17.5 million at September 30, 2015 and December 31, 2014, were pledged as collateral to secure public deposits, overnight payment processing 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. In August 2015, the Bank purchased 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 $2.4 million and $2.4 million as of September 30, 2015 and December 31, 2014, respectively.

NOTE 6

LOANS:

Loans receivable outstanding are summarized as follows:


(Dollars are in thousands)	September 30, 2015		December 31, 2014
Real estate secured:
Commercial	$	101,210	$	108,062
Construction and land development		13,248		15,439
Residential 1-4 family		239,866		243,538
Multifamily		13,325		14,409
Farmland		21,970		25,252

Total real estate loans		389,619		406,700
Commercial		20,515		21,807
Agriculture		4,508		3,117
Consumer installment loans		23,831		25,828
All other loans		65		97

Total loans	$	438,538	$	457,549

Loans receivable on nonaccrual status are summarized as follows:


(Dollars are in thousands)	September 30, 2015		December 31, 2014
Real estate secured:
Commercial	$	5,083	$	6,222
Construction and land development		611		332
Residential 1-4 family		8,053		8,589
Multifamily		433		118
Farmland		3,632		5,982

Total real estate loans		17,812		21,243
Commercial		7		554
Agriculture		14		18
Consumer installment loans		47		46
All other loans		—		—

Total loans receivable on nonaccrual status	$	17,880	$	21,861

Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2015 and 2014 was $486 thousand and $343 thousand, respectively.

The following table presents information concerning the Company’s investment in loans considered impaired as of September 30, 2015 and December 31, 2014:


As of September 30, 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	$	4,615	$	102	$	5,318	$	6,840	$	—
Construction and land development		13		1		11		11		—
Residential 1-4 family		3,623		140		3,694		3,806		—
Multifamily		543		5		433		474		—
Farmland		5,346		94		4,932		5,836		—
Commercial		333		—		—		—		—
Agriculture		44		3		36		36		—
Consumer installment loans		36		4		57		57		—
All other loans		—		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		3,043		58		2,021		2,073		763
Construction and land development		394		—		400		655		224
Residential 1-4 family		2,294		84		2,155		2,355		194
Multifamily		28		—		—		—		—
Farmland		942		28		775		791		337
Commercial		83		3		71		71		26
Agriculture		26		1		21		21		21
Consumer installment loans		13		—		—		—		—
All other loans		—		—		—		—		—

Total	$	21,376	$	523	$	19,924	$	23,026	$	1,565


As of December 31, 2014 (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	$	9,628	$	128	$	3,986	$	5,166	$	—
Construction and land development		248		1		15		15		—
Residential 1-4 family		2,959		177		3,245		3,471		—
Multifamily		370		26		438		479		—
Farmland		5,383		114		5,767		6,801		—
Commercial		421		—		548		674		—
Agriculture		62		4		52		52		—
Consumer installment loans		12		1		15		15		—
All other loans		—		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		6,338		132		4,517		4,905		1,482
Construction and land development		505		14		303		355		88
Residential 1-4 family		4,248		126		2,573		2,852		347
Multifamily		268		7		113		113		15
Farmland		2,573		59		1,104		1,116		343
Commercial		407		4		74		74		26
Agriculture		39		2		30		30		30
Consumer installment loans		10		—		—		—		—
All other loans		—		—		—		—		—

Total	$	33,471	$	795	$	22,780	$	26,118	$	2,331

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


As of September 30, 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	$	1,104	$	533	$	2,759	$	4,396	$	96,814	$	101,210	$	—
Construction and land Development		45		17		225		287		12,961		13,248		—
Residential 1-4 family		5,396		2,733		1,906		10,035		229,831		239,866		—
Multifamily		48		—		320		368		12,957		13,325		—
Farmland		73		476		182		731		21,239		21,970		—

Total real estate loans		6,666		3,759		5,392		15,817		373,802		389,619		—
Commercial		42		—		7		49		20,466		20,515		—
Agriculture		36		—		—		36		4,472		4,508		—
Consumer installment Loans		121		2		22		145		23,686		23,831		—
All other loans		8		—		—		8		57		65		—

Total loans	$	6,873	$	3,761	$	5,421	$	16,055	$	422,483	$	438,538	$	—


As of December 31, 2014 (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	$	2,683	$	74	$	2,411	$	5,168	$	102,894	$	108,062	$	—
Construction and land development		94		335		12		441		14,998		15,439		—
Residential 1-4 family		7,885		1,728		2,346		11,959		231,579		243,538		—
Multifamily		320		—		—		320		14,089		14,409		—
Farmland		661		453		—		1,114		24,138		25,252		—

Total real estate loans		11,643		2,590		4,769		19,002		387,698		406,700		—
Commercial		64		15		162		241		21,566		21,807		—
Agriculture		—		4		—		4		3,113		3,117		—
Consumer installment Loans		153		19		21		193		25,635		25,828		—
All other loans		22		6		—		28		69		97		—

Total loans	$	11,882	$	2,634	$	4,952	$	19,468	$	438,081	$	457,549	$	—

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 September 30, 2015 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Real estate secured:
Commercial	$	86,141	$	8,756	$	6,313	$	—	$	101,210
Construction and land development		10,621		2,051		576		—		13,248
Residential 1-4 family		227,054		2,608		10,204		—		239,866
Multifamily		12,628		190		507		—		13,325
Farmland		15,872		375		5,723		—		21,970

Total real estate loans		352,316		13,980		23,323		—		389,619
Commercial		16,723		3,587		205		—		20,515
Agriculture		4,471		—		37		—		4,508
Consumer installment loans		23,723		—		108		—		23,831
All other loans		65		—		—		—		65

Total	$	397,298	$	17,567	$	23,673	$	—	$	438,538


As of December 31, 2014 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Real estate secured:
Commercial	$	92,515	$	7,925	$	7,622	$	—	$	108,062
Construction and land development		12,974		2,041		424		—		15,439
Residential 1-4 family		230,184		1,965		11,389		—		243,538
Multifamily		13,953		146		310		—		14,409
Farmland		18,159		270		6,823		—		25,252

Total real estate loans		367,785		12,347		26,568		—		406,700
Commercial		18,495		2,548		764		—		21,807
Agriculture		3,069		—		48		—		3,117
Consumer installment loans		25,719		—		109		—		25,828
All other loans		97		—		—		—		97

Total	$	415,165	$	14,895	$	27,489	$	—	$	457,549

NOTE 7

ALLOWANCE FOR LOAN LOSSES:

The following table details activity in the allowance for loan losses by portfolio segment for the period ended September 30, 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 September 30, 2015 (Dollars are in thousands)	Beginning Balance		Charge Offs			Recoveries		Advances		Provisions			Ending Balance
Real estate secured:
Commercial	$	4,418	$	(639	)	$	145	$	—	$	(734	)	$	3,190
Construction and land development		199		(114	)		187		—		135			407
Residential 1-4 family		2,572		(532	)		77		—		559			2,676
Multifamily		154		(384	)		5		—		505			280
Farmland		913		(88	)		212		—		(367	)		670

Total real estate loans		8,256		(1,757	)		626		—		98			7,223
Commercial		457		(85	)		1,237		—		(1,250	)		359
Agriculture		125		—			1		—		27			153
Consumer installment loans		171		(93	)		21		—		54			153
All other loans		1		—			—		—		—			1
Unallocated		912		—			—		—		(129	)		783

Total	$	9,922	$	(1,935	)	$	1,885	$	—	$	(1,200	)	$	8,672


	Allowance for Loan Losses							Recorded Investment in Loans
As of September 30, 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	$	763	$	2,427		$	3,190	$	7,339	$	93,871		$	101,210
Construction and land development		224		183			407		411		12,837			13,248
Residential 1-4 family		194		2,482			2,676		5,849		234,017			239,866
Multifamily		—		280			280		433		12,892			13,325
Farmland		337		333			670		5,707		16,263			21,970

Total real estate loans		1,518		5,705			7,223		19,739		369,880			389,619
Commercial		26		333			359		71		20,444			20,515
Agriculture		21		132			153		57		4,451			4,508
Consumer installment loans		—		153			153		57		23,774			23,831
All other loans		—		1			1		—		65			65
Unallocated		—		783			783		—		—			—

Total	$	1,565	$	7,107		$	8,672	$	19,924	$	418,614		$	438,538

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2014. 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, 2014 (Dollars are in thousands)	Beginning Balance		Charge Offs			Recoveries		Advances		Provisions			Ending Balance
Real estate secured:
Commercial	$	5,203	$	(2,190	)	$	427	$	—	$	978		$	4,418
Construction and land development		1,184		(292	)		236		—		(929	)		199
Residential 1-4 family		3,316		(1,063	)		148		—		171			2,572
Multifamily		133		(41	)		—		—		62			154
Farmland		1,224		(830	)		520		—		(1	)		913

Total real estate loans		11,060		(4,416	)		1,331		—		281			8,256
Commercial		1,147		(47	)		29		—		(672	)		457
Agriculture		337		(17	)		1		—		(196	)		125
Consumer installment loans		153		(79	)		40		—		57			171
All other loans		2		—			—		—		(1	)		1
Unallocated		381		—			—		—		531			912

Total	$	13,080	$	(4,559	)	$	1,401	$	—	$	—		$	9,922


	Allowance for Loan Losses							Recorded Investment in Loans
As of December 31, 2014 (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	$	1,482	$	2,936		$	4,418	$	8,503	$	99,559		$	108,062
Construction and land development		88		111			199		318		15,121			15,439
Residential 1-4 family		347		2,225			2,572		5,818		237,720			243,538
Multifamily		15		139			154		551		13,858			14,409
Farmland		343		570			913		6,871		18,381			25,252

Total real estate loans		2,275		5,981			8,256		22,061		384,639			406,700
Commercial		26		431			457		622		21,185			21,807
Agriculture		30		95			125		82		3,035			3,117
Consumer installment loans		—		171			171		15		25,813			25,828
All other loans		—		1			1		—		97			97
Unallocated		—		912			912		—		—			—

Total	$	2,331	$	7,591		$	9,922	$	22,780	$	434,769		$	457,549

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 September 30, 2015 there were $9.9 million in loans that are classified as troubled debt restructurings compared to $10.0 million at December 31, 2014. The following table presents information related to loans modified as troubled debt restructurings during the nine and three months ended September 30, 2015 and 2014.


	For the nine months ended September 30, 2015						For the nine months ended September 30, 2014
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		1		551		302		—		—		—
Residential 1-4 family		2		225		224		2		596		596
Multifamily		—		—		—		—		—		—
Farmland		—		—		—		—		—		—

Total real estate loans		3		776		526		2		596		596
Commercial		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Consumer installment loans		—		—		—		—		—		—
All other loans		—		—		—		—		—		—

Total		3	$	776	$	526		2	$	596	$	596


	For the three months ended September 30, 2015						For the three months ended September 30, 2014
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		2		225		224		2		596		596
Multifamily		—		—		—		—		—		—
Farmland		—		—		—		—		—		—

Total real estate loans		2		225		224		2		596		596
Commercial		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Consumer installment loans		—		—		—		—		—		—
All other loans		—		—		—		—		—		—

Total		2	$	225	$	224		2	$	596	$	596

During the nine months ended September 30, 2015, the Company modified the terms of three loans for which the modification was considered to be a troubled debt restructuring. On two of the loans we modified the terms and lowered the interest rate. On one loan the interest rate was not modified; however, the maturity date was extended. During the nine months ended September 30, 2014, the Company modified two loans that were considered to be troubled debt restructurings. On the two loans we modified the terms and lowered the interest rate.

There were no loans modified as troubled debt restructurings that defaulted during the nine or three months ended September 30, 2015 and 2014, 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

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 nine months ended September 30, 2015 and 2014, potential common shares of 1,539,877 and 2,630,086, 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 September 30,				For the nine months ended September 30,
(Amounts in Thousands, Except Share and Per Share Data)	2015		2014		2015		2014
Net income	$	2,293	$	393	$	3,377	$	164
Weighted average shares outstanding		22,878,654		21,872,293		22,878,654		21,872,293
Dilutive shares for stock options and warrants		—		—		—		—

Weighted average dilutive shares outstanding		22,878,654		21,872,293		22,878,654		21,872,293


Basic income per share	$	0.10	$	0.02	$	0.15	$	0.01
Diluted income per share	$	0.10	$	0.02	$	0.15	$	0.01

NOTE 10

TRUST PREFERRED SECURITIES AND DEFERRAL OF INTEREST PAYMENTS:

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 September 30, 2015 of 2.06%.

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 September 30, 2015 of 2.89%.

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 prohibits the payment of interest on the trust preferred securities without prior regulatory approval. As a result, dividends on trust preferred securities issued by the Company have been deferred until such restriction is removed. This deferral is 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 was no interest in arrears on the trust preferred securities as of December 31, 2014.

At this time the Company is not deferring the payment of the interest on the trust preferred securities, however, as discussed above, regulatory approval is needed to pay the interest. 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.

Future payments still require regulatory approval and failure to obtain this approval could cause a default in the trust preferred securities by the Company, however, the Company has the option to re-enter another 60 month deferral of the interest on the trust preferred securities to prevent an event of default unless the regulators prohibit the deferral.

NOTE 11

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. The Company’s available-for-sale securities, totaling $102.4 million and $100.1 million at September 30, 2015 and December 31, 2014, 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 $18.4 million and $20.4 million at September 30, 2015 and December 31, 2014, respectively.

Foreclosed Assets – Foreclosed assets are recorded at fair value, less selling costs, 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 $15.2 million and $15.0 million at September 30, 2015 and December 31, 2014, respectively.

Assets and liabilities measured at fair value are as follows as of September 30, 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	$	—	$	41,808	$	—
Taxable municipals		—		3,316		—
Corporate bonds		—		947
Mortgage backed securities		—		56,312		—

(On a non-recurring basis)
Other real estate owned		—		—		15,195
Impaired loans:
Real estate secured:
Commercial		—		—		6,576
Construction and land development		—		—		187
Residential 1-4 family		—		—		5,655
Multifamily		—		—		433
Farmland		—		—		5,370
Commercial		—		—		45
Agriculture		—		—		36
Consumer installment loans		—		—		57
All other loans		—		—		—

Total	$	—	$	102,383	$	33,554

Assets and liabilities measured at fair value are as follows as of December 31, 2014 (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	$	—	$	44,070	$	—
Taxable municipals		—		288
Mortgage backed securities		—		55,711		—

(On a non-recurring basis)
Other real estate owned		—		—		15,049
Impaired loans:
Real estate secured:
Commercial		—		—		7,021
Construction and land development		—		—		230
Residential 1-4 family		—		—		5,471
Multifamily		—		—		536
Farmland		—		—		6,528
Commercial		—		—		596
Agriculture		—		—		52
Consumer installment loans		—		—		15
All other loans		—		—		—

Total	$	—	$	100,069	$	35,498

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:


(Dollars in thousands)	Fair Value at September 30, 2015		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values

Impaired Loans	$	18,359	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	$	15,195	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 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 September 30, 2015 and December 31, 2014. 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 during the months of September 2015 and December 2014.


					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)

September 30, 2015
Financial Instruments – Assets
Net Loans	$	429,866	$	432,560	$	—	$	414,201	$	18,359

Financial Instruments – Liabilities
Time Deposits		266,212		266,394		—		266,394		—
FHLB Advances		3,258		3,258		—		3,258		—

December 31, 2014
Financial Instruments – Assets
Net Loans	$	447,627	$	451,225	$	—	$	430,776	$	20,449

Financial Instruments – Liabilities
Time Deposits		299,974		301,309		—		301,309		—
FHLB Advances		4,158		4,158		—		4,158		—

NOTE 12

LIFE INSURANCE INVESTMENTS:

We have life insurance policies on the life of one key officer and three former key officers. The Bank is the beneficiary under each policy. The aggregate total cash surrender value of the policies was $12.1 million and $12.0 million at September 30, 2015 and December 31, 2014, respectively. The policies owned on current and former officers are separate account life insurance policies and the income is based on a short term investment portfolio managed by the insurance provider which should increase in earnings when and if interest rates increase in the future.

In addition, we owned a policy in which the Bank was the beneficiary which was acquired in 2010 as part of a settlement with a former borrower on several defaulted loans. This policy was a general account policy with a minimum earning rate and had a cash surrender value of $287 thousand at December 31, 2014. This policy was redeemed by the Bank in August 2015 after receiving notification of the death of the insured. As a result we received death benefits of $1.8 million that were applied as a recovery of $1.2 million on the defaulted loans, redemption of the cash surrender value of $357 thousand being carried on the policy at the time of redemption, and earnings on life insurance of $217 thousand.

NOTE 13

SUBEQUENT EVENTS:

During the month of October 2015, a member of the board of directors of the Company and his family exercised 233,886 common stock warrants at a price of $1.75 per share. During the month of November 2015, a member of the board of directors of the Company exercised 225,000 common stock warrants at a price of $1.75 per share. As a result of these exercises an additional $803 thousand of capital was raised at the Company. The additional liquidity provided by the funds will be used by the Company to pay its operating expenses and trust preferred interest payments (upon regulatory approval).

NOTE 14

RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

In January 2014, the Financial Accounting Standards Board (“FASB”) amended the Receivables topic of the Accounting Standards Codification (“ASC”). The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments became effective for the Company on January 1, 2015. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements, management will need to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the organization’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will be effective for the Company for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. 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 will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its 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. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2015, the FASB issued amendments to clarify the 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. The Company does not expect these amendments to have a material effect on its financial statements.

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 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 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. 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, business strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.

Written Agreement

The Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions. Under this Agreement, the Bank agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for

maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, which has been done.

The Company and the Bank agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Agreement, the Company and the Bank appointed a committee to monitor compliance. The directors of the Company and the Bank recognized and unanimously agree with the common goal of financial soundness represented by the Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

Written Agreement Progress Report

At September 30, 2015, we have timely submitted each required plan by its respective deadline and believe we are compliant with the Agreement. We have worked with independent consultants to assist us in these efforts and the following actions have taken place:

With regard to corporate governance, we have established a weekly Director’s Loan Committee to oversee all loan approvals and all loan renewals, extensions and approvals for loans risk rated Special Mention or worse, as well as, exposures exceeding the Chief Credit Officer’s lending authority. This has enabled the Board to increase its oversight of the Bank’s largest credit exposures and problem credits, and enhanced the monitoring and compliance with all loan policies and procedures. Secondly, we have enhanced our reporting of credit quality to the board. Furthermore, we have adopted formal charters for our Nominating, Compliance, Compensation, Loan, ALCO, and Executive Committees. A corporate governance policy was adopted by the Board of Directors on April 23, 2012.

The requirement to assess the Board and management has been completed by an independent party. A report was issued to the Board and recommendations are being followed. In September 2010, our President and CEO Jonathan Mullins was added as a member of the Board and in November 2010, Eugene Hearl was added as a member of the Board. Mr. Hearl has over 40 years banking experience as President and CEO for two community banks and Regional President of a large regional financial institution.

In December 2014, President & CEO Mullins resigned from his position and from the Board of Directors. His successor, C. Todd Asbury, was promoted from Executive Vice President, Chief Financial Officer, Secretary and Treasurer to President and CEO of the Company and the Bank. Frank Sexton, Jr. who serves as the Company and Bank’s Executive Vice President and Chief Operating Officer was appointed as Interim Chief Financial Officer, Secretary and Treasurer.

In April 2015, Joseph D. Pennington was appointed as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of the Company and the Bank. He had served as Senior Vice President and Financial Officer of the Company and Bank since joining in February 2015. Mr. Pennington, who is a certified public accountant, has over 15 years of community banking experience.

In conjunction with Mr. Pennington’s appointment, Mr. Sexton no longer serves as Interim Chief Financial Officer, Secretary and Treasurer of the Company and Bank. He will continue serving as the Company and Bank’s Executive Vice President and Chief Operating Officer where he has served since 2003.

In addition, training is a key initiative of both the Board of Directors and employees. Further training of the Board and employees has been implemented and will be ongoing.

A formal management succession plan has been developed and approved by the Board of Directors.

In the month of September 2010, a newly revised strategic plan and a capital plan were completed and submitted to our regulators. The 2011 Budget was submitted to our regulators in the fourth quarter of 2010. The 2012 Budget was submitted to our regulators also in the fourth quarter of 2011. The 2013 Budget was submitted to our regulators in January 2013. A revised 2013 Budget was submitted to our regulators in the third quarter of 2013. The 2014 Budget was submitted to our regulators in December 2013. A revised 2014 Budget was provided to our regulators in the third quarter of 2014. The 2015 Budget was submitted to our regulators in December 2014.

A revised strategic plan for the years 2013 through 2015 was completed and submitted to the regulators in January 2013.

A new strategic plan for the years 2014 through 2016 was submitted to our regulators in the fourth quarter of 2013. A new strategic plan for the years 2015 through 2017 was submitted to our regulators in the fourth quarter of 2014. A new capital plan for the years 2015 through 2017 was submitted to our regulators in April 2015 for regulatory review.

In September 2012, we converted notes payable to two of our directors totaling $5.5 million plus accrued interest of $272 thousand to common stock. As a result of the conversion, New Peoples returned to well capitalized status at September 30, 2012.

In accordance with our capital plan, we began a common stock offering in July 2012 to existing shareholders followed by an offering to the public during the third and fourth quarters of 2012. The offering was closed on December 20, 2012 and proceeds of $12,061,257 were received on December 28, 2012. Upon receipt of the proceeds $7.0 million of capital was injected into the subsidiary Bank. The remaining net proceeds were held at the Company and are used for payment of operating expenses and, as permitted by regulatory authorities, the payment of deferred trust preferred interest and for future capital injections into the Bank, if needed; thus, providing a source of strength at the holding company level for the Bank. In addition, the conversion of the director notes to common stock and the common stock warrants included in the offering potentially provide additional capital if, and when, they are exercised.

On September 29, 2014 $500 thousand of capital was injected into the Bank from the Company. On October 9, 2014 an additional $1.25 million of capital was injected into the Bank from the Company to bring the total capital injected into the Bank during 2014 to $1.75 million. This increased the capital position and capital ratios of the Bank.

During the month of October 2014, members of the board of directors and management of the Company exercised 1,006,261 common stock warrants which had been issued as part of the stock offering at a price of $1.75 per share. As a result an additional $1.76 million of capital was raised at the Company. These funds helped to offset the $1.75 million of funds used for the capital injections mentioned above.

A total of 898,895 common stock warrants were outstanding as of November 13, 2015 with an exercise price of $1.75. Assuming all of these warrants are exercised before expiration, then an additional $1.6 million in capital would be provided.

Loan policies have been revised; an online approval and underwriting system for loans has been implemented; underwriting, monitoring and management of credits and collections have been enhanced; and the focus on problem loans intensified at all levels in the organization. As a result, we are more timely identifying problem loans. In the future, continuing these procedures should strengthen asset quality substantially. Further training of lending personnel is ongoing regarding proper risk grading of credits and identification of problem credits. Due to the minimal number of rating changes in more recent external loan reviews, indicating better risk identification for the loan portfolio, we are reducing the frequency of external loan reviews in 2015 from a semiannual basis to an annual basis.

Enhanced loan concentration identification and new procedures for monitoring and managing concentrations have been implemented. Loan concentration targets were established and efforts were made to reduce higher risk concentrations. In particular, construction and development loans and commercial real estate loans have been reduced to acceptable levels as determined by the new policies.

To strengthen management of credit quality and loan production, we added a new Chief Credit Officer, Stephen Trescot, in the first quarter of 2011 who brought vast credit administration experience to our management team. Sharon Borich, our former Chief Credit Officer, assumed the role of Senior Lending Officer with oversight of loan production and business development which was her area of expertise. Ms. Borich took a leave of absence in March 2015, and Tammy Herron, was appointed as Interim Senior Vice President & Senior Commercial Loan Officer, and assumed Ms. Borich’s responsibilities. In August 2015, the Bank appointed J.W. Kiser as First Senior Vice President and Senior Commercial Banking Officer. In conjunction with Mr. Kiser’s appointment, Ms. Herron was relieved of her interim duties and resumed her duties as First Vice President and Commercial Loan Officer. On February 28, 2014, Stephen Trescot retired as Executive Vice President and Chief Credit Officer of the Bank. Karen Wimmer was appointed as Executive Vice President and Chief Credit Officer of the Bank effective March 1, 2014. Ms. Wimmer previously served as Senior Vice President and Senior Credit Officer of the Bank since the fourth quarter of 2012 in which she reported directly to Mr. Trescot. Ms. Wimmer has a total of 27 years of banking experience.

In addition to new lending policies and procedures, the management of all real estate development projects and draws has been centralized. We have segregated the duties of lenders for greater specialization of commercial and retail lending responsibilities. As a result we have formed a commercial loan division that is supervised by Mr. Kiser. The retail lending responsibilities is supervised by Andy Mullins, First Senior Vice President and Senior Retail Banking Officer. The retail loans are primarily the responsibility of branch personnel who report to branch managers and respective area managers.

The credit analysis function has been restructured and is a part of credit administration. The credit analysis function is led by a Vice President/Senior Analyst, who supervises two analysts, of which, one analyst is a Certified Public Accountant. The function reports directly to the Executive Vice President and Chief Credit Officer and is responsible for analyzing new and renewed loan relationships of $250 thousand or more prior to approval and conducting annual financial reviews of loan relationships of $500 thousand or more.

The appraisal review function consists of a Vice President, who is an experienced licensed appraiser and an administrative assistant. This function also reports directly to the Chief Credit Officer. The appraisal review function reviews the quality of appraisals on behalf of the Bank by reviewing the methods, assumptions, and value conclusions of internal and external appraisals. In addition, this data is used to determine whether an external appraiser should be utilized for future work.

We retained an independent third party to perform loan reviews on a quarterly basis in 2010 and 2011 and engaged them in 2012, 2013, and 2014 to perform this function semi-annually. In 2015, we engaged them to perform this function once annually, and the review was conducted in June 2015. From 2010 to 2012, the third party loan review company conducted two loan portfolio stress tests in order for the Bank to obtain a better understanding of potential loan losses. In 2013 and 2014, we conducted our own loan portfolio stress tests. For 2015 the Bank re-engaged the third party loan review company to perform a loan stress test, which was conducted in August 2015 utilizing June 30, 2015 data.

To support the focus on problem credit management the Bank, in March 2011, formed a Special Assets department which reports to the Chief Credit Officer. Presently, the department has one workout specialist/Vice President, one OREO Associate managing other real estate owned properties, a collections supervisor/Vice President, and one support personnel, exclusive of legal department staff. Substantially all the credits in the Bank which are risk rated Substandard or worse are assigned to this department once all efforts to return the credit to a satisfactory rating have been exhausted. This department is organizationally structured to manage workout situations, collections, other real estate owned, nonperforming assets, and relevant watch list credits. Also as a functioning part of this department is the Bank’s legal department, which in July 2015 was reorganized as the Loss Mitigation Department. This department is managed by a Loss Mitigation Manager/Vice President who reports to the Chief Credit Officer. New reporting and monitoring is conducted monthly by this division. Material changes to Special Asset credits are reported to the Board at the time of occurrence and, quarterly, the Board receives written action plans and status updates on all problem credits in excess of $1.0 million. A quarterly management watch list committee has been established to actively manage and monitor these credits. During 2014 an experienced real estate broker was employed under an independent contract basis to facilitate the Bank’s need to substantially reduce its OREO portfolio. The consultant/broker individually reviewed each OREO property for possible pricing reductions or potential marketing opportunities to allow for an accelerated sale process. Effective March 2015, the OREO consultant’s contract was cancelled.

A new allowance for loan loss model was implemented and reviewed independently during 2010. The Board has approved a new allowance for loan loss policy. The primary responsibility of the maintenance of the allowance

for loan loss model and credit reporting resides with a designated employee. The allowance for loan loss and the methodology supporting the results are approved quarterly by the Audit Committee of the Board of Directors, and ratified by the Board.

10.

We have significantly increased our asset-based liquidity sources starting in 2010, to meet financial obligations. A new liquidity risk management policy has been adopted and a revised contingency funding plan has been created. We have a newly reinstated $3.0 million unsecured federal funds lines of credit in the second quarter of 2015, and we have added an internet certificate of deposit funding source to increase contingent funding sources. We believe that we have adequate liquidity in normal and stressed situations. Our investment portfolio also serves as a valuable source of liquidity. The investment portfolio has grown to $102.4 million at September 30, 2015 from $4.7 million at December 31, 2010.

11.

In the fourth quarter of 2009, we ceased the declaration of dividends from the Bank to the Company. We also deferred interest payments on our trust preferred securities issuances pursuant to the Written Agreement. The Written Agreement prohibits the payment of interest on the trust preferred securities without prior regulatory approval. As a result, interest on trust preferred securities issued by the Company had been deferred until such restriction was removed. 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 were no interest payments in arrears on the trust preferred securities as of December 31, 2014.

At this time the Company is not deferring the payment of the interest on the trust preferred securities; however, as discussed above, regulatory approval is needed to pay the quarterly interest payments. 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. Future payments still require regulatory approval and failure to obtain this approval could cause a default in the trust preferred securities by the Company; however, the Company has the option to re-enter another 60 month deferral of the interest on the trust preferred securities to prevent an event of default unless the regulators prohibit the deferral.

12.

Anti-money laundering and bank secrecy act programs and training have been enhanced.

Critical Accounting Policies

For discussion of our significant accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2014. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and related valuation allowance.

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required.

Our deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized in the foreseeable future, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.

Overview

The Company had net income for the quarter ended September 30, 2015 of $2.3 million, or basic net income per share of $0.10, as compared to a net income of $393 thousand, or basic net income per share of $0.02, for the quarter ended September 30, 2014. This is an improvement of $1.9 million, or $0.08 per share. The improvement was mainly driven by a negative provision for loan losses of $1.2 million and a reduction of noninterest expenses of $527 thousand. The Company had net income for the nine months ending September 30, 2015 of $3.4 million, or basic net income per share of $0.15, as compared to the nine months ending September 30, 2014 whereby the Company had net income of $164 thousand, or $0.01 basic income per share. This is an improvement of $3.2 million, or $0.14 per share.

Quarter-to-Date Results

Highlights from the third quarter of 2015 include:

•

A negative provision for loan losses of $1.2 million;

•

A reduction of $527 thousand, or 7.68%, in noninterest expenses when compared to the third quarter of 2014;

•

A reduction of $251 thousand, or 25.64%, in interest expense when compared to the third quarter of 2015;

•

Received regulatory approval to make the third quarter interest payments on trust preferred securities;

•

Net charge offs of $50 thousand for the nine-months ended September 30, 2015, which is an improvement of $2.6 million, or 98.10%, versus net charges offs of $2.6 million reported for the nine-months end September 30, 2014;

•

A decrease of $9.7 million, or 3.51%, in higher-costing time deposits during the quarter;

•

Strong net interest margin of 3.99% for the quarter;

•

An improvement in all regulatory capital ratios which exceeds “well capitalized” as defined by regulatory guidelines; and,

•

Book value per share of $2.03 as of September 30, 2015.

In the third quarter of 2015, our net interest margin was 3.99%, as compared to 3.73% for the same period in 2014, an improvement of 26 basis points, while on a linked-quarter basis, the net interest margin improved 13 basis points from 3.86%. Net interest income during the third quarters of 2015 and 2014 were $5.7 and $5.6 million, respectively.

The Company’s primary source of income, net interest income, increased $24 thousand, or 0.43%, to $5.7 million for the third quarter of 2015 from $5.6 million for the same period in 2014. Loan interest income decreased $297 thousand, or 4.80%, from $6.2 million for the third quarter of 2014 to $5.9 million for the third quarter of 2015. Investment interest income has grown for the third quarter of 2015 to $457 thousand from $366 thousand for the third quarter of 2014. Interest expense decreased $251 thousand, or 25.64%, from $1.0 million for the quarter ending September 30, 2014 to $728 thousand for the same quarter of 2015 as a result of time deposits re-pricing at lower interest rates at maturity, as well as a favorable shift in the deposit mix whereby our higher-cost time deposits were replaced with lower-cost deposit products.

Noninterest income for the third quarter of 2015 was $1.8 million, which is an increase of $167 thousand when compared to the $1.6 million for the same period in 2014. This increase was primarily due to the $217 thousand in life insurance earnings we received in August 2015 as the result of the death benefits we received on the life insurance policy that the Bank was the beneficiary on, that was acquire in 2010 as part of a settlement with a former borrower on several defaulted loans.

Noninterest expense decreased $527 thousand, or 7.68%, to $6.3 million for the third quarter 2015 as compared to $6.9 million for the third quarter of 2014. Salaries and employee benefits decreased $209 thousand, or 6.53% in the quarter-to-quarter comparison from $3.2 million at September 30, 2014 to $3.0 million for the same period in 2015. This decrease was mainly due to management’s decision to close four lower-performing branches in October 2014 which resulted in staff reductions during 2014 and attrition. Occupancy and equipment expenses decreased $34 thousand from $939 thousand for the third quarter of 2014 to $905 thousand for the third quarter of 2015. Advertising expense increased $20 thousand in the quarter to quarter comparison. Data processing and telecommunication expenses decreased $13 thousand quarter to quarter mainly due to a change in outsourced statements processing.

Year-to-Date Results

Net interest income year-to-date for September 30, 2015 was $16.7 million, which was a slight decline of $355 thousand, or 2.08% when compared to the same period in 2014. Loan interest income for the first nine months of 2015 decreased $1.2 million, or 6.48%, from $18.8 million as of September 30, 2014 to $17.6 million as of September 30, 2015.

This decrease is primarily related to a decline in average loans, continued high level of nonaccrual loans, and newer loans being booked at lower interest rates. Somewhat offsetting the decline in interest income from loans was increased income from our securities portfolio. Interest from investment securities increased $250 thousand, or 23.67%, for the nine-months ended September 30, 2015. Also aiding in offsetting the decline in interest income from loans was the interest paid on deposits. Interest expense on deposits declined $640 thousand, for the nine-months ended September 30, 2015, when comparing it to the same period in 2014. The main driver in the decline in interest expense on deposits is the 6.34%, or $38.2 million, decline in deposits when comparing the balances at September 30, 2015 and 2014, respectively. Also aiding in the decline in deposit expense is the favorable shift in the deposit mix of higher-costing time deposits to lower-costing non-time deposits. Total interest expense for the first nine months declined $661 thousand, or 21.63%, to $2.4 million as of September 30, 2015 as compared to $3.1 million as of September 30, 2014.

Year-to-date September 30, 2015, noninterest income increased to $4.8 million from $4.5 million in 2014.

Noninterest expense decreased $2.2 million, or 10.08%, for the first nine months of 2015 from $21.4 million as of September 30, 2014 to $19.2 million as of September 30, 2015. For the nine-months ending September 30, 2015, salaries and employee benefits decreased $794 thousand, or 8.26%, to $8.8 million as compared to $9.6 million for the same period in 2014. This decrease was mainly due to management’s decision to close four lower-performing branches in October 2014 which resulted in staff reductions during 2014 and attrition. Total full time equivalent employees have decreased to 247 at September 30, 2015 from 265 at September 30, 2014, a reduction of 18, or 6.79%. For the first nine months of 2015, FDIC assessment expense decreased $472 thousand, or 41.99%, from $1.1 million as of September 30, 2014 to $652 thousand as of September 30, 2015. The reduction of average assets from September 30, 2014 to September 30, 2015 is a contributing factor to the FDIC assessment decrease. Other real estate owned and repossessed asset expenses decreased $532 thousand, or 27.56%, to $1.4 million for the first nine months of 2015 as compared to $1.9 million for the same period in 2014. As management is increasing its efforts to dispose of properties held for an extended period of time, we realized additional writedowns in both the third quarters of 2015 and 2014. Writedowns on other real estate owned decreased $173 thousand from $957 thousand during the first nine months of 2014 to $784 thousand. In the first nine months of 2015 we had a net gain on the sale of other real estate owned property of $10 thousand compared to a net loss of $183 thousand during the same period in 2014. OREO increased in the first nine months of 2015 to $15.2 million at September 30, 2015 from $15.0 million at December 31, 2014. We anticipate the levels to decrease as we are taking a more aggressive approach toward liquidating properties to reduce our level of foreclosed properties; however, we cannot guarantee that this will happen as we continue to resolve problem loans that may end up in foreclosed properties in the future.

Our efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 85.13% for the third quarter of 2015 as compared to 94.64% for the same period in 2014 and 89.77% for the first nine months of 2015 as compared to 99.28% for the same period in 2014. Included in this calculation are the other real estate owned write-downs which significantly and negatively impact the ratio. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity.

Balance Sheet

Total assets decreased $17.3 million, or 2.66%, to $633.8 million at September 30, 2015 from $651.1 million at December 31, 2014. The main driver in the decline was a decrease of $19.0 million in loans, offset somewhat by an increase in investment securities of $2.3 million.

Total investments increased $2.3 million, or 2.31%, to $102.4 million at September 30, 2015 from $100.1 million at December 31, 2014. Interest bearing deposits with banks decreased $3.1 million, or 15.05%, in the first nine months of 2015 to $17.8 million from $20.9 million at December 31, 2014. As deemed appropriate, we will continue to invest surplus funds in investment securities to help increase interest income.

Total loans decreased $19.0 million, or 4.15%, to $438.5 million at September 30, 2015 as compared to $457.5 million at December 31, 2014. This decrease is the result of a deliberate strategy to preserve/improve the Company’s capital ratios as well as low loan demand, charge offs of $1.9 million in the first nine months of 2015, aggressive resolution of problem loans through collection efforts, tighter underwriting guidelines, and intense competition from other lenders in our footprint. We anticipate loan levels to stabilize and then grow in the future, but there may be further reduction as we continue our efforts to decrease substandard and nonperforming loans. We are beginning to turn our strategy from capital preservation to conservatively growing the loan portfolio as we refocus our efforts away from complying with the Written Agreement to enhancing shareholder value. As a start to our refocus on loan growth, we started two retail lending campaigns in the first and second quarter of2015 and are starting to pursue commercial banking relationships in 2015. To assist in these efforts, in August 2015, J.W. Kiser was hired as First Senior Vice President and Senior Commercial Banking Officer of the Bank. Mr. Kiser’s focus will be to grow our commercial banking relationships.

Total deposits decreased $20.6 million from $585.2 million at December 31, 2014 to $564.6 million at September 30, 2015. Noninterest bearing deposits declined 0.53%, or $756 thousand, from $144.0 million at December 31, 2014 to $143.2 million at September 30, 2015. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities. We experienced an increase of $2.8 million, or 9.54%, in interest-bearing demand deposits during the first nine months of 2015. We have experienced a $13.2 million, or 4.63%, increase in non-maturity deposits. However, this increase is offset by time deposits decreasing by $33.8 million, or 11.25%, from $300.0 million at December 31, 2014 to $266.2 million at September 30, 2015. The shift from higher-costing time deposits to lower-costing non-maturity deposits represents a favorable repositioning of the Company’s deposit mix. We believe the continued decrease in time deposits is primarily the result of the prolonged low interest rate environment.

Total equity at September 30, 2015 was $46.4 million. That represents an increase of $3.5 million, or 8.30%, when compared to the December 31, 2014 balance of $42.9 million. Net income of $3.4 million during the nine-months ended September 30, 2015 was the primary driver of the increase.

Asset Quality

We continue to make significant progress in reducing the levels of non-performing assets. However, as asset quality improves the level of nonperforming assets remains elevated as a result of the prolonged deteriorated residential and commercial real estate markets, as well as the sluggish economy. Loans rated substandard decreased $3.8 million, or 13.88%, to $23.7 million at September 30, 2015 from $27.5 million at December 31, 2014. The ratio of nonperforming assets to total assets lowered to 5.22% at September 30, 2015 as compared to 5.67% at December 31, 2014. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, decreased to $33.1 million at September 30, 2015 from $36.9 million at December 31, 2014, a reduction of $3.8 million, or 10.39%. We continue undertaking extensive and more aggressive measures to work out these credits and liquidate foreclosed properties in an effort to accelerate a reduction of nonperforming assets. Our goal is to reduce the nonperforming assets being mindful of the impact to earnings and capital; however, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets. Delinquencies also showed improvement in the first nine months of 2015 as total past due loans decreased to $16.1 million at September 30, 2015 from $19.5 million at December 31, 2014, an improvement of $3.4 million, or 17.53%. Overall, we believe the asset quality has stabilized and is steadily improving.

Other real estate owned (“OREO”) increased $146 thousand to $15.2 million at September 30, 2015 from $15.0 million at December 31, 2014. All properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first nine months of 2015, we acquired $2.2 million in other real estate owned as a result of settlement of foreclosed loans, which was offset by sales of $1.3 million of our properties with gains of $10 thousand realized as a result of the sales. We also recorded writedowns on other real estate owned properties in the amount of $784 thousand for the first nine months of 2015 resulting from current valuations and estimated liquidation discounts relative to market conditions. Future sales of these properties are contingent upon an economic recovery; consequently, it is difficult to estimate the duration of our ownership of these assets. However, we are taking an aggressive approach toward liquidating properties to reduce our level of foreclosed properties. We do have lease agreements on certain other real estate owned properties which are generating rental income at market rates.

Our allowance for loan losses at September 30, 2015 was $8.7 million, or 1.98% of total loans as compared to $9.9 million, or 2.17% of total loans at December 31, 2014. Impaired loans decreased $2.9 million, or 12.54%, to $19.9 million with an estimated related allowance of $1.6 million for potential losses at September 30, 2015 as compared to $22.8 million in impaired loans with an estimated related allowance of $2.3 million at the end of 2014. No provision for loan losses was recorded during first nine months of 2015 or 2014. In the first nine months of 2015, net charge offs were $50 thousand as compared to $2.6 million in the same period of 2014. Included in the net charge offs is a recovery of $1.2 million, which was due to the receipt in August 2015 of death benefits on a life insurance policy on which the Bank was the beneficiary. The policy was acquired in 2010 as part of a settlement with a former borrower on several defaulted loans. As a result of this $1.2 million recovery a negative provision for loan losses of $1.2 million was made in the third quarter of 2015. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.

Capital Ratios

At September 30, 2015, the Company remains well-capitalized. The Tier 1 leverage ratio was 9.64% at September 30, 2015, compared to 8.07% at December 31, 2014. The Tier 1 risk based ratio was 16.41% at September 30, 2015, compared to 14.26% at December 31, 2014. The Total risked based capital ratio was 17.83% at September 30, 2015, compared to 15.98% at December 31, 2014.

At September 30, 2015, the Bank also remains well capitalized under the regulatory framework for prompt corrective action. The following ratios existed at September 30, 2015 for the Bank: Tier 1 leverage ratio of 9.66%, Tier 1 risk based capital ratio of 16.44%, and Total risk based capital ratio of 17.71%. The ratios were as follows at December 31, 2014: Tier 1 leverage ratio of 8.19%, Tier 1 risk based capital ratio of 14.46%, and Total risk based capital ratio of 15.73%.

The ratios mentioned above for the Company and Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015. As a result of these new rules the Company and Bank are now subject to a Common Equity Tier 1 ratio. As of September 30, 2015, the Common Equity Tier 1 ratio was 12.29% and 16.44% for the Company and Bank, respectively. The Common Equity Tier 1 ratio was not applicable for December 31, 2014.

Deferred Tax Asset and Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset of $4.9 million existed at September 30, 2015 as compared to a net deferred tax asset of $5.0 million at December 31, 2014. At September 30, 2015 we had a valuation allowance of $5.3 million as compared to a valuation allowance of $6.4 million at December 31, 2014. During the first nine months of 2015 we reversed $1.1 million of our deferred tax valuation allowance. As of September 30, 2015, the Company had $15.5 million of net operating loss carryforwards which will expire in 2031 thru 2035. Management expects to utilize all of these carryforwards prior to expiration. Direct charge-offs contributed to a reduction of the tax asset and are permitted as tax deductions. In addition, writedowns on other real estate owned property are expensed for book purposes but are not deductible for tax purposes until disposition of the property. Goodwill expense also was realized for book purposes in 2011 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. When, and if, taxable income increases in the future and during the net operating loss carryforward period, this valuation allowance may be reversed and used to decrease tax obligations in the future. Our income tax expense was computed at the normal corporate income tax rate of 34% of taxable income included in net income. We do not have significant nontaxable income or nondeductible expenses.

Capital Resources

Our total capital at the end of the third quarter 2015 was $46.4 million compared to $42.9 million at December 31, 2014. The increase was $3.5 million, or 8.30%. The Bank and the Company were both well capitalized as of September 30, 2015, as defined by the regulatory capital guidelines. New Peoples equity as a percentage of total assets was 7.32% at September 30, 2015 compared to 6.58% at December 31, 2014. The book value per common share was $2.03 at September 30, 2015 compared to $1.87 at December 31, 2014.

Under current economic conditions, we believe it is prudent to continue to increase capital to absorb potential losses that may occur if asset quality deteriorates further. Capital needs and requirements are affected by the level of problem assets, growth, earnings and other factors. Based upon projections, we believe increasing capital through earnings will be sufficient to provide for the Company’s capital needs and requirements. As part of our initiative to improve regulatory capital ratios, we are working to further reduce our nonperforming assets, and focused on replacing these assets with high-quality interest-earning assets. Deposit growth is primarily focused on growing core deposits, which are mainly transaction accounts, commercial relationships and savings products. We are focused on improving earnings by maintaining a strong net interest margin and decreasing overhead expenses. We are fully implementing this strategy to increase capital, however, these efforts alone may not provide us adequate capital if net losses are realized or asset quality further deteriorates.

No cash dividends have been paid historically and none are anticipated in the foreseeable future. Earnings will continue to be retained to build capital.

Liquidity

We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $122.0 million at September 30, 2015, up from $118.1 million at December 31, 2014. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2015.

At September 30, 2015, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $87.7 million, which is net of those securities pledged as collateral. This will primarily serve as a source of liquidity while yielding a higher return than other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Our investment portfolio was $102.4 million at September 30, 2015 and $100.1 million at December 31, 2014. Our strategy is to manage the portfolio with future purchases that reduce price risk in a rising interest rate environment and shorten the duration of these securities to be able to invest in higher yielding loans and investments when interest rates do rise again unless and until interest rates rise again, however, this strategy reduces investment income.

Our loan-to-deposit ratio was 77.67% at September 30, 2015 and 78.19% at December 31, 2014. We anticipate this ratio to remain at or below 80% in the near future as loan demand remains low.

Available third party sources of liquidity remain intact at September 30, 2015 which includes the following: our line of credit with the Federal Home Loan Bank of Atlanta, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. In May 2015, we received notification that a $3.0 million unsecured fed funds line of credit facility with a correspondent bank had been reinstated, which gives us an additional source of liquidity.

At September 30, 2015, we had borrowings from the Federal Home Loan Bank totaling $3.3 million as compared to $4.2 million at December 31, 2014. None are overnight and subject to daily interest rate changes. The borrowings have a maturity date in the year 2018, but reduce in principal amounts monthly or quarterly. The decrease of $900 thousand was due to regularly scheduled principal payments. We also used our line of credit with the Federal Home Loan Bank to issue a letter of credit for $3.0 million in 2010 and $7.0 million in 2013 to the Treasury Board of Virginia for collateral on public funds. An additional $103.5 million was available on September 30, 2015 on the $116.8 million line of credit, which is secured by a blanket lien on our residential real estate loans.

We have access to the brokered deposits market. Currently we have $2.7 million in 10 year term time deposits comprised of $3 thousand incremental deposits which yield an interest rate of 4.10%. With the exception of CDARS time deposits, we have no other brokered deposits. Though this has not been a strategy in the past, we may utilize this source in the future as a lower cost source of funds.

We are a member of an internet certificate of deposit network whereby we may obtain funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in a liquidity crisis event.

The Bank has access to additional liquidity through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, we do not anticipate using this funding source except as a last resort.

Additional liquidity is expected to be provided by loan repayments and core deposit growth that will result from an increase in market share in our targeted trade area.

With the increased asset liquidity and other external sources of funding, we believe at the Bank level we have adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control.

Concerning the Company’s liquidity, we have $754 thousand in cash as of September 30, 2015. These funds will be used to pay operating expenses, trust preferred interest payments (upon regulatory approval), and provide additional capital injections to the Bank, if needed.

The Written Agreement prohibits the payment of interest on the trust preferred securities without prior regulatory approval. In October 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. Future payments still require regulatory approval and failure to obtain this approval could cause a default in the trust preferred securities by the Company; however, the Company has the option to re-enter another 60 month deferral of the interest on the trust preferred securities to prevent an event of default unless the regulators prohibit the deferral.

During the capital raise in 2012, common stock warrants were issued to investors. The warrants are immediately exercisable through December 2017 at a price of $1.75 per share. In the month of October 2015 233,886 warrants were exercised and in the month of November 2015 225,000 warrants were exercised which reduced the number of warrants outstanding at November 13, 2015 to 898,895. When, and if, these warrants are exercised, additional funds may be received by the Company, which provides potentially up to $1.6 million in additional liquidity and capital at the Company level. Additional contingent funding sources will be explored as available.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the quarter ended September 30, 2015 to the off-balance sheet items and the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2014.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.

Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our “CEO”) and our Senior Vice President and Chief Financial Officer (our “CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2015 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Part II Other Information

Item 1.

Legal Proceedings

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3.

Defaults Upon Senior Securities

Not Applicable

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

Not Applicable

Item 6.

Exhibits

See Index of Exhibits.

SIGNATURES

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


		NEW PEOPLES BANKSHARES, INC.
		(Registrant)

By:		/s/ C. TODD ASBURY
		C. Todd Asbury
		President and Chief Executive Officer

Date:		November 16, 2015

By:		/s/ JOSEPH D. PENNINGTON
		Joseph D. Pennington
		Senior Vice President and Chief Financial Officer

Date:		November 16, 2015

Index of Exhibits


No.		Description

2.1		Agreement and Plan of Share Exchange dated August 15, 2011 (incorporated by reference to Exhibit 2 to Form 8-K filed December 17, 2011).

3.1		Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).

3.2		Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on April 15, 2004).

4.1		Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

4.2		Form of Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

4.3		Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

10.1*		New Peoples Bank, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001).

10.2*		Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed November 30, 2004).

10.3*		Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed November 30, 2004).

10.4*		Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

10.5*		First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

10.6*		Letter Agreement, dated as of June 29, 2009, between the Company and Kenneth D. Hart (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).

10.7		Written Agreement, effective August 4, 2010, by and among New Peoples Bankshares, Inc., New Peoples Bank, Inc., the Federal Reserve Bank of Richmond and the State Corporation Commission Bureau of Financial Institutions (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 6, 2010).

10.8		Engagement Letters of Scott & Stringfellow, LLC (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

10.9		Convertible Note Payable, B. Scott White, dated June 27, 2012 (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 29, 2012).

10.10		Convertible Note Payable, Harold Lynn Keene, dated June 27, 2012 (incorporated by reference to Exhibit 10.2 to Form 8-K filed June 29, 2012).

31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2		Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

32		Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials for the Company’s 10-Q Report for the quarterly period ended September 30, 2015, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

*	Denotes management contract.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company