Quarterly Report (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 March 31, 2017

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

For the transition period from ____________ to _____________

Commission file number: 000-33411

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

n/a

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

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

Yes

[X]

[ ]

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]

[ ]

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


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

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

Yes

[ ]

[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 May 12, 2017
Common Stock, $2.00 par value		23,355,457

NEW PEOPLES BANKSHARES, INC.

		INDEX

			Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
Consolidated Statements of Income – Three Months
Ended March 31, 2017 and 2016 (Unaudited)			1
Consolidated Statements of Comprehensive Income – Three Months
Ended March 31, 2017 and 2016 (Unaudited)			3
Consolidated Balance Sheets – March 31, 2017 (Unaudited) and December 31, 2016			4

Consolidated Statements of Changes in Stockholders’ Equity -
Three Months Ended March 31, 2017 and 2016 (Unaudited)			6

Consolidated Statements of Cash Flows – Three Months
Ended March 31, 2017 and 2016 (Unaudited)			7

Notes to Consolidated Financial Statements			9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32

Item 4.	Controls and Procedures		32

PART II OTHER INFORMATION

Item 1.	Legal Proceedings		33

Item 1A. Risk Factors			33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 3.	Defaults upon Senior Securities		33

Item 4.	Mine Safety Disclosures		33

Item 5.	Other Information		33

Item 6.	Exhibits		33

SIGNATURES			34

Part I Financial Information

Item 1

Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


INTEREST AND DIVIDEND INCOME	2017		2016
Loans including fees	$	5,664	$	5,565
Interest-earning deposits with banks		43		21
Investments		350		464
Dividends on equity securities (restricted)		32		32
Total Interest and Dividend Income		6,089		6,082

INTEREST EXPENSE
Deposits
Demand		13		11
Savings		47		41
Time deposits below $100,000		289		265
Time deposits above $100,000		189		154
FHLB advances		45		36
Federal funds purchased		—		2
Trust preferred securities		141		122
Total Interest Expense		724		631

NET INTEREST INCOME		5,365		5,451

PROVISION FOR LOAN LOSSES		—		—

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		5,365		5,451

NONINTEREST INCOME
Service charges		833		488
Fees, commissions and other income		802		805
Insurance and investment fees		52		158
Net realized gains on sale of investment securities		—		105
Life insurance investment income		27		30
Total Noninterest Income		1,714		1,586

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NONINTEREST EXPENSES
Salaries and employee benefits		3,381			3,210
Occupancy and equipment expense		1,127			853
Advertising and public relations		93			104
Data processing and telecommunications		553			581
FDIC insurance premiums		102			134
Other real estate owned and repossessed vehicles, net		300			163
Other operating expenses		1,422			1,292
Total Noninterest Expenses		6,978			6,337

INCOME BEFORE INCOME TAXES		101			700

INCOME TAX EXPENSE (BENEFIT)		(14	)		2

NET INCOME	$	115		$	698

Income Per Share
Basic	$	0.00		$	0.03
Fully Diluted	$	0.00		$	0.03

Average Weighted Shares of Common Stock
Basic		23,354,890			23,354,082
Fully Diluted		23,354,890			23,354,082

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

	2017			2016

NET INCOME	$	115		$	698

Other comprehensive income:
Investment Securities Activity
Unrealized gains arising during the period		89			785
Tax related to unrealized gains		(30	)		(267	)
Reclassification of realized gains during the period		—			(105	)
Tax related to realized gains		—			36
TOTAL OTHER COMPREHENSIVE INCOME		59			449
TOTAL COMPREHENSIVE INCOME	$	174		$	1,147

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)


ASSETS	March 31,			December 31,
	2017			2016
		(Unaudited)			(Audited)

Cash and due from banks	$	17,924		$	18,500
Interest-bearing deposits with banks		21,664			16,816
Federal funds sold		108			132
Total Cash and Cash Equivalents		39,696			35,448

Investment securities available-for-sale		72,010			70,011

Loans receivable		476,490			468,629
Allowance for loan losses		(5,968	)		(6,072	)
Net Loans		470,522			462,557

Bank premises and equipment, net		29,937			29,985
Equity securities (restricted)		2,585			2,802
Other real estate owned		10,161			10,655
Accrued interest receivable		1,734			1,848
Life insurance investments		12,301			12,274
Deferred taxes, net		5,255			5,285
Other assets		3,393			3,470

Total Assets	$	647,594		$	634,335

LIABILITIES

Deposits:
Demand deposits:
Noninterest bearing	$	159,301		$	151,914
Interest-bearing		41,663			40,213
Savings deposits		123,403			114,492
Time deposits		248,384			247,819
Total Deposits		572,751			554,438

Federal Home Loan Bank advances		8,458			13,758
Accrued interest payable		342			331
Accrued expenses and other liabilities		2,455			2,395
Trust preferred securities		16,496			16,496

Total Liabilities		600,502			587,418

Commitments and contingencies

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STOCKHOLDERS’ EQUITY

Common stock - $2.00 par value; 50,000,000 shares authorized;
23,355,457 and 23,354,457 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		46,711			46,709
Common stock warrants		763			764
Additional paid-in-capital		13,965			13,965
Retained deficit		(13,950	)		(14,065	)
Accumulated other comprehensive loss		(397	)		(456	)

Total Stockholders’ Equity		47,092			46,917

Total Liabilities and Stockholders’ Equity	$	647,594		$	634,335

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)


	Shares of Common Stock		Common Stock		Common Stock Warrants			Additional Paid-in- Capital		Retained Earnings (Deficit)			Accum-ulated Other Compre-hensive Income (Loss)			Total Stockholders’ Equity

Balance, December 31, 2015		23,354	$	46,708	$	764		$	13,965	$	(15,023	)	$	(327	)	$	46,087

Net income		—		—		—			—		698			—			698

Other comprehensive income, net of tax		—		—		—			—		—			449			449
Balance, March 31, 2016		23,354	$	46,708	$	764		$	13,965	$	(14,325	)	$	122		$	47,234

Balance, December 31, 2016		23,354	$	46,709	$	764		$	13,965	$	(14,065	)	$	(456	)	$	46,917

Net income		—		—		—			—		115			—			115

Exercise of common stock warrants		1		2		(1	)		—		—			—			1

Other comprehensive income, net of tax		—		—		—			—		—			59			59
Balance, March 31, 2017		23,355	$	46,711	$	763		$	13,965	$	(13,950	)	$	(397	)	$	47,092

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(IN THOUSANDS)

(UNAUDITED)

	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	115		$	698
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		638			551
Income on life insurance		(27	)		(30	)
Gain on sale of securities available-for-sale		—			(105	)
Gain on sale of premises and equipment		(1	)		—
Gain on sale of foreclosed assets		(24	)		(43	)
Adjustment of carrying value of foreclosed real estate		176			(4	)
Accretion of bond premiums/discounts		201			253
Deferred tax benefit		—			(70	)
Net change in:
Interest receivable		114			22
Other assets		77			(1,407	)
Accrued interest payable		11			(1	)
Accrued expenses and other liabilities		60			2,518
Net Cash Provided by Operating Activities		1,340			2,382

CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans		(8,777	)		(10,233	)
Purchase of securities available-for-sale		(6,564	)		(100	)
Proceeds from sale and maturities of securities available-for-sale		4,453			17,564
Net sale (purchase) of equity securities (restricted)		217			(314	)
Payments for the purchase of premises and equipment		(593	)		(3,215	)
Proceeds from sale of premises and equipment		4			—
Proceeds from sales of other real estate owned		1,154			68
Net Cash Provided by (Used in) Investing Activities		(10,106	)		3,770

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CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of common stock warrants		1			—
Net increase (decrease) in Federal Home Loan Bank advances		(5,300	)		9,700
Net change in:
Demand deposits		8,837			10,696
Savings deposits		8,911			(7,816	)
Time deposits		565			(5,683	)
Net Cash Provided by Financing Activities		13,014			6,897

Net increase in cash and cash equivalents		4,248			13,049
Cash and Cash Equivalents, Beginning of Period		35,448			26,338
Cash and Cash Equivalents, End of Period	$	39,696		$	39,387

Supplemental Disclosure of Cash Paid During the Period for:
Interest	$	713		$	632
Taxes	$	—		$	70

Supplemental Disclosure of Non Cash Transactions:
Other real estate acquired in settlement of foreclosed loans	$	1,624		$	1,063
Loans made to finance sale of foreclosed real estate	$	812		$	244
Change in unrealized gains on securities available-for-sale	$	89		$	680

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS:

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

NOTE 2 ACCOUNTING PRINCIPLES:

These consolidated financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at March 31, 2017 and December 31, 2016, and the results of operations for the three-month periods ended March 31, 2017 and 2016. 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, 2016. The results of operations for the three month periods ended March 31, 2017 and 2016 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 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 related to outstanding common stock warrants are determined by the Treasury method. For the three-months ended March 31, 2017 and 2016, potential common shares of 880,978 and 882,353, respectively, were anti-dilutive and were not included in the calculation. Basic and diluted net income per common share calculations follows:

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(Amounts in Thousands, Except Share and Per Share Data)	For the three months ended March 31,
	2017		2016
Net income	$	115	$	698
Weighted average shares outstanding		23,354,890		23,354,082
Dilutive shares for stock warrants		—		—
Weighted average dilutive shares outstanding		23,354,890		23,354,082

Basic income per share	$	0.00	$	0.03
Diluted income per share	$	0.00	$	0.03

NOTE 4 CAPITAL:

Capital Requirements and Ratios

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), Tier 1 capital (as defined) to average assets (as defined), and Common Equity Tier 1 capital (as defined) to risk-weighted assets (as defined). As of March 31, 2017, the Bank meets all capital adequacy requirements to which it is subject.

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of March 31, 2017 and December 31, 2016, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

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	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017:
Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		67,196		16.19	%	$	33,197		8.0	%	$	41,496		10.0	%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		61,999		14.94	%		24,898		6.0	%		33,197		8.0	%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.		61,999		9.73	%		25,498		4.0	%		31,873		5.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		61,999		14.94	%		18,673		4.5	%		26,973		6.5	%

December 31, 2016:
Total Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		67,549		16.64	%	$	32,476		8.0	%	$	40,595		10.0	%
Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		62,462		15.39	%		24,357		6.0	%		32,476		8.0	%
Tier 1 Capital to Average Assets:
New Peoples Bank, Inc.		62,462		9.93	%		25,149		4.0	%		31,436		5.0	%
Common Equity Tier 1 Capital to Risk Weighted Assets:
New Peoples Bank, Inc.		62,462		15.39	%		18,268		4.5	%		26,386		6.5	%

As of March 31, 2017, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and Common Equity Tier 1 ratios as set forth in the above tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.

Under Basel III Capital requirements, a capital conservation buffer of 0.625% became effective beginning on January 1, 2016. The capital conservation buffer will be gradually increased through January 1, 2019 to 2.5%. Banks will be required to maintain levels that meet the required minimum plus the capital conservation buffer in order to make distributions, such as dividends, or discretionary bonus payments.

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NOTE 5 INVESTMENT SECURITIES:

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

				Gross		Gross		Approximate
		Amortized		Unrealized		Unrealized		Fair
(Dollars are in thousands)		Cost		Gains		Losses		Value
March 31, 2017
U.S. Government Agencies	$	24,611	$	77	$	218	$	24,470
Taxable municipals		2,332	3		48		2,287
Corporate bonds		3,600	189		-		3,789
Mortgage backed securities		42,069	26		631		41,464
Total Securities AFS	$	72,612	$	295	$	897	$	72,010

December 31, 2016
U.S. Government Agencies	$	24,821	$	80	$	269	$	24,632
Taxable municipals		2,340	2		50		2,292
Corporate bonds		3,600	149		-		3,749
Mortgage backed securities		39,941	25		628		39,338
Total Securities AFS	$	70,702	$	256	$	947	$	70,011

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016.


	Less than 12 Months				12 Months or More				Total
(Dollars are in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2017
U.S. Government Agencies	$	12,661	$	204	$	2,461	$	14	$	15,122	$	218
Taxable municipals		1,559		48		—		—		1,559		48
Corporate bonds		—		—		—		—		—		—
Mtg. backed securities		29,695		541		5,195		90		34,890		631
Total Securities AFS	$	43,915	$	793	$	7,656	$	104	$	51,571	$	897

December 31, 2016
U.S. Government Agencies	$	12,081	$	250	$	2,449	$	19	$	14,530	$	269
Taxable municipals		1,561		50		—		—		1,561		50
Corporate bonds		500		—		—		—		500		—
Mtg. backed securities		28,680		543		4,655		85		33,335		628
Total Securities AFS	$	42,822	$	843	$	7,104	$	104	$	49,926	$	947

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At March 31, 2017, the available-for-sale portfolio included 112 investments for which the fair market value was less than amortized cost. At December 31, 2016, the available-for-sale portfolio included 107 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.

There were no sales of investment securities during the three months ended March 31, 2017. Gross proceeds on the sale of investment securities were $12.9 million for the three months ended March 31, 2016, with $119 thousand of gross gains realized and $14 thousand of gross losses realized.

The amortized cost and fair value of investment securities at March 31, 2017, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


						Weighted
(Dollars are in thousands)		Amortized		Fair		Average
Securities Available-for-Sale		Cost		Value		Yield
Due in one year or less	$	-	$	-		-%
Due after one year through five years	2,184		2,177		2.04%
Due after five years through ten years		14,026		14,149		2.64%
Due after ten years		56,402		55,684		2.04%
Total	$	72,612	$	72,010		2.16%

Investment securities with a carrying value of $9.4 million and $11.3 million at March 31, 2017 and December 31, 2016, respectively, were pledged as collateral to secure public deposits and for other purposes required by law.

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.6 million and $2.8 million as of March 31, 2017 and December 31, 2016, respectively.

NOTE 6 LOANS:

Loans receivable outstanding are summarized as follows:


(Dollars are in thousands)	March 31, 2017		December 31, 2016
Real estate secured:
Commercial	$	103,457	$	103,331
Construction and land development		26,588		25,755
Residential 1-4 family		252,917		249,700
Multifamily		14,135		12,582
Farmland		24,912		24,948
Total real estate loans		422,009		416,316
Commercial		28,259		26,955
Agriculture		3,662		3,164
Consumer installment loans		21,839		22,188
All other loans		721		6
Total loans	$	476,490	$	468,629

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Loans receivable on nonaccrual status are summarized as follows:


(Dollars are in thousands)	March 31, 2017		December 31, 2016
Real estate secured:
Commercial	$	2,102	$	3,403
Construction and land development		328		319
Residential 1-4 family		7,706		8,355
Multifamily		162		166
Farmland		3,541		1,003
Total real estate loans		13,839		13,246
Commercial		11		—
Agriculture		83		83
Consumer installment loans		49		76
All other loans		—		—
Total loans receivable on nonaccrual status	$	13,982	$	13,405

Total interest income not recognized on nonaccrual loans for the three months ended March 31, 2017 and 2016 was $363 thousand and $94 thousand, respectively.

The following table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2017 and December 31, 2016:

As of March 31, 2017 (Dollars are in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Real estate secured:
Commercial	$	2,755	$	3,128	$	—
Construction and land development		4		4		—
Residential 1-4 family		3,781		4,084		—
Multifamily		731		772		—
Farmland		3,872		4,592		—
Commercial		—		—		—
Agriculture		19		19		—
Consumer installment loans		9		9		—
All other loans		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		611		697		125
Construction and land development		229		463		95
Residential 1-4 family		846		872		103
Multifamily		—		—		—
Farmland		589		602		297
Commercial		66		66		17
Agriculture		1		1		1
Consumer installment loans		—		—		—
All other loans		—		—		—
Total	$	13,513	$	15,309	$	638

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As of December 31, 2016 (Dollars are in thousands)		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Real estate secured:
Commercial	$	3,636	$	4,055	$	—
Construction and land development		5		5		—
Residential 1-4 family		3,861		4,182		—
Multifamily		301		342		—
Farmland		3,895		4,601		—
Commercial		—		—		—
Agriculture		19		19		—
Consumer installment loans		26		43		—
All other loans		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		1,191		1,270		65
Construction and land development		240		469		106
Residential 1-4 family		555		565		56
Multifamily		—		—		—
Farmland		591		602		299
Commercial		67		67		18
Agriculture		5		5		5
Consumer installment loans		9		9		3
All other loans		—		—		—
Total	$	14,401	$	16,234	$	552

The following table presents information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated:

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	Three Months Ended
	March 31, 2017					March 31, 2016
(Dollars are in thousands)	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate secured:
Commercial	$	3,196	$	25		$	4,479	$	35
Construction and land development		5		—			171		(1	)
Residential 1-4 family		3,821		49			3,599		51
Multifamily		516		12			269		2
Farmland		3,884		(115	)		4,149		51
Commercial		—		—			—		—
Agriculture		19		—			36		1
Consumer installment loans		18		—			27		1
All other loans		—		—			—		—
With an allowance recorded:
Real estate secured:
Commercial		901		2			1,768		—
Construction and land development		235		—			283		—
Residential 1-4 family		701		9			1,271		5
Multifamily		—		—			117		2
Farmland		590		5			640		6
Commercial		67		—			74		1
Agriculture		3		—			117		(2	)
Consumer installment loans		5		—			28		—
All other loans		—		—			—		—
Total	$	13,961	$	(13	)	$	17,028	$	152

An age analysis of past due loans receivable is below. At March 31, 2017 and December 31, 2016, there were no loans over 90 days past due that were accruing.


As of March 31, 2017 (Dollars are in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	1,239	$	200	$	18	$	1,457	$	102,000	$	103,457
Construction and land development		—		16		66		82		26,506		26,588
Residential 1-4 family		3,509		1,319		1,372		6,200		246,717		252,917
Multifamily		—		436		—		436		13,699		14,135
Farmland		245		475		2,562		3,282		21,630		24,912
Total real estate loans		4,993		2,446		4,018		11,457		410,552		422,009
Commercial		76		—		11		87		28,172		28,259
Agriculture		27		—		79		106		3,556		3,662
Consumer installment Loans		42		3		24		69		21,770		21,839
All other loans		—		—		—		—		721		721
Total loans	$	5,138	$	2,449	$	4,132	$	11,719	$	464,771	$	476,490

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As of December 31, 2016 (Dollars are in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	1,676	$	307	$	1,083	$	3,066	$	100,265	$	103,331
Construction and land development		103		17		44		164		25,591		25,755
Residential 1-4 family		4,237		1,547		2,233		8,017		241,683		249,700
Multifamily		1,367		—		—		1,367		11,215		12,582
Farmland		2,987		—		—		2,987		21,961		24,948
Total real estate loans		10,370		1,871		3,360		15,601		400,715		416,316
Commercial		20		—		—		20		26,935		26,955
Agriculture		19		—		78		97		3,067		3,164
Consumer installment Loans		110		15		36		161		22,027		22,188
All other loans		—		—		—		—		6		6
Total loans	$	10,519	$	1,886	$	3,474	$	15,879	$	452,750	$	468,629

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.

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Based on the most recent analysis performed, the risk category of loans receivable was as follows:


As of March 31, 2017 (Dollars are in thousands)	Pass		Special Mention		Substandard		Total
Real estate secured:
Commercial	$	92,675	$	8,465	$	2,317	$	103,457
Construction and land development		24,826		1,434		328		26,588
Residential 1-4 family		242,254		2,083		8,580		252,917
Multifamily		11,989		1,350		796		14,135
Farmland		18,993		1,613		4,306		24,912
Total real estate loans		390,737		14,945		16,327		422,009
Commercial		27,485		708		66		28,259
Agriculture		3,564		14		84		3,662
Consumer installment loans		21,762		—		77		21,839
All other loans		721		—		—		721
Total	$	444,269	$	15,667	$	16,554	$	476,490
As of December 31, 2016 (Dollars are in thousands)		Pass		Special Mention		Substandard		Total
Real estate secured:
Commercial	$	92,562	$	6,922	$	3,847	$	103,331
Construction and land development		23,905		1,531		319		25,755
Residential 1-4 family		238,400		2,117		9,183		249,700
Multifamily		10,848		1,367		367		12,582
Farmland		19,070		1,545		4,333		24,948
Total real estate loans		384,785		13,482		18,049		416,316
Commercial		26,197		691		67		26,955
Agriculture		3,076		—		88		3,164
Consumer installment loans		22,086		—		102		22,188
All other loans		6		—		—		6
Total	$	436,150	$	14,173		18,306	$	468,62 9

NOTE 7 ALLOWANCE FOR LOAN LOSSES:

The following table details activity in the allowance for loan losses by portfolio segment for the period ended March 31, 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

As of March 31, 2017 (Dollars are in thousands)	Beginning Balance		Charge Offs			Recoveries		Provisions			Ending Balance
Real estate secured:
Commercial	$	1,625	$	(73	)	$	—	$	9		$	1,561
Construction and land development		346		—			—		(33	)		313
Residential 1-4 family		2,376		(162	)		23		2			2,239
Multifamily		241		—			—		33			274
Farmland		428		—			5		60			493
Total real estate loans		5,016		(235	)		28		71			4,880
Commercial		163		—			119		(69	)		213
Agriculture		31		—			1		(5	)		27
Consumer installment loans		123		(30	)		13		7			113
All other loans		—		—			—		5			5
Unallocated		739		—			—		(9	)		730
Total	$	6,072	$	(265	)	$	161	$	—		$	5,968

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		Allowance for Loan Losses						Recorded Investment in Loans
As of March 31, 2017 (Dollars are in thousands)		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Real estate secured:
Commercial	$	125	$	1,436	$	1,561	$	3,366	$	100,091	$	103,457
Construction and land development		95		218		313		233		26,355		26,588
Residential 1-4 family		103		2,136		2,239		4,627		248,290		252,917
Multifamily		-		274		274		731		13,404		14,135
Farmland		297		196		493		4,461		20,451		24,912
Total real estate loans		620		4,260		4,880		13,418		408,591		422,009
Commercial		17		196		213		66		28,193		28,259
Agriculture		1		26		27		20		3,642		3,662
Consumer installment loans		-		113		113		9		21,830		21,839
All other loans		-		5		5		-		721		721
Unallocated		-		730		730		-		-		-
Total	$	638	$	5,330	$	5,968	$	13,513	$	462,977	$	476,490

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

As of December 31, 2016 (Dollars are in thousands)	Beginning Balance		Charge Offs			Recoveries		Provisions			Ending Balance
Real estate secured:
Commercial	$	2,384	$	(557	)	$	220	$	(422	)	$	1,625
Construction and land development		332		(5	)		26		(7	)		346
Residential 1-4 family		2,437		(720	)		87		572			2,376
Multifamily		232		(18	)		—		27			241
Farmland		675		(2	)		103		(348	)		428
Total real estate loans		6,060		(1,302	)		436		(178	)		5,016
Commercial		266		(65	)		62		(100	)		163
Agriculture		124		—			7		(100	)		31
Consumer installment loans		128		(83	)		24		54			123
All other loans		1		—			—		(1	)		—
Unallocated		914		—			—		(175	)		739
Total	$	7,493	$	(1,450	)	$	529	$	(500	)	$	6,072

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		Allowance for Loan Losses						Recorded Investment in Loans
As of December 31, 2016 (Dollars are in thousands)		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Real estate secured:
Commercial	$	65	$	1,560	$	1,625	$	4,827	$	98,504	$	103,331
Construction and land development		106		240		346		245		25,510		25,755
Residential 1-4 family		56		2,320		2,376		4,416		245,284		249,700
Multifamily		-		241		241		301		12,281		12,582
Farmland		299		129		428		4,486		20,462		24,948
Total real estate loans		526		4,490		5,016		14,275		402,041		416,316
Commercial		18		145		163		67		26,888		26,955
Agriculture		5		26		31		24		3,140		3,164
Consumer installment loans		3		120		123		35		22,153		22,188
All other loans		-		-		-		-		6		6
Unallocated		-		739		739		-		-		-
Total	$	552	$	5,520		6,072	$	14,401	$	454,228	$	468,629

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

At March 31, 2017 there were $9.3 million in loans that are classified as troubled debt restructurings compared to $9.6 million at December 31, 2016. The following table presents information related to loans modified as troubled debt restructurings during the three months ended March 31, 2017 and 2016.


	For the three months ended March 31, 2017					For the three months ended March 31, 2016
Troubled Debt Restructurings (Dollars are in thousands)	# of Loans		Pre-Mod. Recorded Investment		Post-Mod. Recorded Investment	# of Loans		Pre-Mod. Recorded Investment		Post-Mod. Recorded Investment
Real estate secured:
Commercial	-	$	-	$	-	1	$	341	$	339
Construction and land Development	-		-		-	-		-		-
Residential 1-4 family	-		-		-	-		-		-
Multifamily	-		-		-	-		-		-
Farmland	-		-		-	-		-		-
Total real estate loans	-		-		-	1		341		339
Commercial	-		-		-	-		-		-
Agriculture	-		-		-	-		-		-
Consumer installment loans	-		-		-	-		-		-
All other loans	-		-		-	-		-		-
Total	-	$	-	$	-	1	$	341	$	339

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During the three months ended March 31, 2017, the Company modified no loans for which the modification was considered to be a troubled debt restructuring. During the three months ended March 31, 2016, the Company modified the terms of one loan for which the modification was considered to be a troubled debt restructuring. The interest rate and maturity date were not modified; however, the payment terms were changed.

No loans modified as troubled debt restructurings defaulted during the three months ended March 31, 2017. There was one commercial real estate loan with a recorded investment of $310 thousand that had been modified as a troubled debt restructuring that defaulted during the three months ended March 31, 2016, which was within twelve months of the loan’s modification date. Generally, a troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

In determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further writedown the carrying value of the loan.

NOTE 9 OTHER REAL ESTATE OWNED:

The following table summarizes the activity in other real estate owned for the three months ended March 31, 2017 and the year ended December 31, 2016:

(Dollars are in thousands)	March 31, 2017			December 31, 2016
Balance, beginning of period	$	10,655		$	12,398
Additions		1,624			4,577
Purchases of/improvements to other real estate owned		—			48
Transfers of other real estate owned to premises and equipment		—			(125	)
Proceeds from sales		(1,966	)		(5,050	)
Adjustment of carrying value		(176	)		(1,414	)
Gain from sales		24			221
Balance, end of period	$	10,161		$	10,655

NOTE 10 FAIR VALUES:

The financial reporting standard, “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

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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 $72.0 million and $70.0 million at March 31, 2017 and December 31, 2016, 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 $12.9 million and $13.8 million at March 31, 2017 and December 31, 2016, respectively.

Foreclosed Assets – Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party less an estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral if further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $10.2 million and $10.7 million at March 31, 2017 and December 31, 2016, respectively.

Assets and liabilities measured at fair value are as follows as of March 31, 2017 (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	$	—	$	24,470	$	—
Taxable municipals		—		2,287		—
Corporate bonds		—		3,789		—
Mortgage backed securities		—		41,464		—
(On a non-recurring basis) Other real estate owned		—		—		10,161
Impaired loans:
Real estate secured:
Commercial		—		—		3,241
Construction and land development		—		—		138
Residential 1-4 family		—		—		4,524
Multifamily		—		—		731
Farmland		—		—		4,164
Commercial		—		—		49
Agriculture		—		—		19
Consumer installment loans		—		—		9
All other loans		—		—		—
Total	$	—	$	72,010	$	23,03 6

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Assets and liabilities measured at fair value are as follows as of December 31, 2016 (for purpose of this table the impaired loans are shown net of the related allowance):

(Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis) Available-for-sale investments
U.S. Government Agencies	$	—	$	24,632	$	—
Taxable municipals		—		2,292		—
Corporate bonds		—		3,749		—
Mortgage backed securities		—		39,338		—
(On a non-recurring basis) Other real estate owned		—		—		10,655
Impaired loans:
Real estate secured:
Commercial		—		—		4,762
Construction and land development		—		—		139
Residential 1-4 family		—		—		4,360
Multifamily		—		—		301
Farmland		—		—		4,187
Commercial		—		—		49
Agriculture		—		—		19
Consumer installment loans		—		—		32
All other loans		—		—		—
Total	$	—	$	70,011	$	24,504

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)	Fair Value at March 31, 2017		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Impaired Loans	$	12,875	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	$	10,161	Appraised Value/Comparable Sales/Other Estimates from Independent Sources	Discounts to reflect current market conditions and estimated costs to sell	0 – 18%

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Fair Value of Financial Instruments

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

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

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2017 and December 31, 2016. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments as of March 31, 2017 and December 31, 2016.

					Fair Value Measurements
(Dollars are in thousands)	Carrying Amount		Fair Value		Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
March 31, 2017
Financial Instruments – Assets
Net Loans	$	470,522	$	475,354	$	—	$	462,479	$	12,875
Financial Instruments – Liabilities
Time Deposits		248,384		247,909		—		247,909		—
FHLB Advances		8,458		8,697		—		8,697		—
December 31, 2016
Financial Instruments – Assets
Net Loans	$	462,557	$	467,707	$	—	$	453,858	$	13,849
Financial Instruments – Liabilities
Time Deposits		247,819		247,258		—		247,258		—
FHLB Advances		13,758		13,993		—		13,993		—

NOTE 11 SUBSEQUENT EVENTS:

On April 13, 2017 the Bank, the wholly-owned subsidiary of the Company, in anticipation of executing a sale-leaseback transaction, entered into a Real Estate Purchase Agreement with NPB Good Steward Properties, LLC (“Good Steward”) pursuant to which the Bank will sell four (4) of its properties, one each located in Abingdon, Bristol, Gate City and Castlewood, Virginia to Good Steward for a total purchase price of $6,169,259. Contemporaneously with the closing of the sale of the properties by the Bank, the Bank will enter into leases with Good Steward for the properties (the “Leases”) which will allow the Bank to continue to service customers from those locations. The sale of the properties is conditioned, among other things, on the negotiation of the Leases for the properties and Good Steward obtaining financing, which the Bank may provide. If the conditions are satisfied the parties expect to close the sale of the properties on or before June 30, 2017. The Bank and its parent, New Peoples Bankshares, Inc. and affiliates have no relationship with Good Steward other than those contemplated by these transactions.

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NOTE 12 RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

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

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

In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company plans to early adopt ASU No. 2016-02 Leases (Topic 842).

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In December 2016, the FASB issued technical corrections and improvements to the Revenue from Contracts with Customers Topic. These corrections make a limited number of revisions to several pieces of the revenue recognition standard issued in 2014. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

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.

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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.

Critical Accounting Policies

For discussion of our significant accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2016. 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

For the quarter ended March 31, 2017 the Company had net income of $115 thousand, or basic net income per share of $0.00, as compared to a net income of $698 thousand, or basic net income per share of $0.03, for the quarter ended March 31, 2016. This is a decrease of $583 thousand, or 83.52%. The decrease was mainly driven by a $641 thousand increase in noninterest expenses during the quarter, which was offset somewhat by a $128 thousand increase in noninterest income.

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Quarter-to-Date Results

Highlights from the first quarter of 2017 include:

A $7.9 million, or 1.68%, increase in loans, during the quarter;

No provision for loan losses taken in the first quarter;

An increase of $18.3 million, or 3.30%, in total deposits;

A decrease of $1.7 million, or 9.57%, in substandard loans during the quarter;

A decrease of $4.2 million, or 26.20%, in total past due loans during the quarter;

The Bank is considered well-capitalized under regulatory standards; and,

Book value per share of $2.02 as of March 31, 2017.

In the first quarter of 2017, our net interest margin was 3.85%, as compared to 3.95% for the same period in 2016, a decrease of 10 basis points. The Company’s primary source of income, net interest income, decreased $86 thousand, or 1.58%, to $5.4 million for the first quarter of 2017 from $5.5 million for the same period in 2016. Loan interest income increased $99 thousand, or 1.78%, from $5.6 million for the first quarter of 2016 to $5.7 million for the first quarter of 2017. Investment interest income decreased in the first quarter of 2017 to $350 thousand from $464 thousand for the first quarter of 2016. Interest expense increased $93 thousand, or 14.74%, from $631 thousand for the quarter ended March 31, 2016 to $724 thousand for the same quarter of 2016 as a result of increases in our interest rates on time deposits

Noninterest income for the first quarter of 2017 was $1.7 million, which is an increase of $128 thousand when compared to the $1.6 million for the same period in 2016. This increase was primarily due to the $352 thousand increase in nonsufficient funds / overdraft fee income during the first three months of 2017 when compared to the same period in 2016. The increase in nonsufficient funds / overdraft fee income was the result of the Optional Overdraft Protection Services we began offering to our deposit customers in June 2016. The increase in nonsufficient funds / overdraft fee income offsets the $105 thousand decrease in gains on the sale of investment securities and $106 thousand decrease in insurance and investment fees.

Noninterest expense increased $641 thousand, or 10.12%, to $7.0 million for the first quarter 2017 as compared to $6.3 million for the first quarter of 2016. Salaries and employee benefits increased $171 thousand, or 5.33% in the quarter-to-quarter comparison, from $3.2 million at March 31, 2016 to $3.4 million for the same period in 2017. This increase was primarily the result of seasoned commercial bankers hired throughout 2016 as a part of our strategy to grow the loan portfolio, the opening of a loan production office in Jonesborough, Tennessee to expand our market presence in the Tri-Cities, Tennessee area, as well as staff added to operate the Interactive Teller Machines (“ITMs”) and provide digital banking services.

Occupancy and equipment expenses increased $274 thousand from $853 thousand for the first quarter of 2016 to $1.1 million for the first quarter of 2017. The increase in occupancy and equipment expenses was mainly due to the rollout of the ITMs during 2016. The ITMs, a new, state-of-the-art technology which replaced the Bank’s ATMs, help provide additional convenience by providing teller services from 7 AM to 7 PM Monday thru Saturday. We anticipate the addition of the ITMs will create efficiencies going forward. Advertising expense decreased $11 thousand in the quarter-to-quarter comparison. Other real estate owned and repossessed asset expenses increased $137 thousand, or 84.05%, to $300 thousand for the first quarter of 2017 as compared to $163 thousand for the same period in 2016. Writedowns on other real estate owned were $176 thousand for the first three months of 2017 as compared to writedowns of $24 thousand for the same period in 2016. During the first three months of 2017 we had net gains on the sale of other real estate owned of $24 thousand as compared to net gains on the sale of other real estate owned of $43 for the same period in 2016.

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 98.57% for the first quarter of 2017 as compared to 90.05% for the same period in 2016. Included in this calculation are the other real estate owned write-downs which significantly and negatively impact the ratio.

Balance Sheet

Total assets increased $13.3 million, or 2.09%, to $647.6 million at March 31, 2017 from $634.3 million at December 31, 2016. The main driver in the increase was an increase of $7.9 million in loans as a result of our efforts to conservatively grow the loan portfolio. Going forward, we anticipate total assets increasing due to our plan to conservatively and prudently grow the loan portfolio, as we were able to accomplish in the first quarter of 2017.

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Total investments increased $2.0 million, or 2.86%, to $72.0 million at March 31, 2017 from $70.0 million at December 31, 2016. Interest bearing deposits with banks increased $4.9 million, or 28.83%, in the first three months of 2017 to $21.7 million from $16.8 million at December 31, 2016.

Total loans increased $7.9 million, or 1.68%, to $476.5 million at March 31, 2017 as compared to $468.6 million at December 31, 2016. We believe the focus on developing new and existing lending relationships should continue the pace of increasing total loans as experienced in the first three months of 2017, subject to the economy and heightened competition in our markets.

Total deposits increased $18.3 million, or 3.30%, from $554.4 million at December 31, 2016 to $572.7 million at March 31, 2017. Noninterest-bearing demand deposits increased 4.86%, or $7.4 million, from $151.9 million at December 31, 2016 to $159.3 million at March 31, 2017. We experienced an increase of $1.5 million, or 3.61%, in interest-bearing demand deposits during the first three months of 2017. We have experienced an $8.9 million, or 7.78%, increase in savings deposits. Time deposits increased by $565 thousand during the first three months of 2017. Due to competitive pressures, rising interest rates, and our need for funding, we expect to see an uptick on the interest we pay on time deposits in 2017. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.

Total borrowings decreased to $8.5 million at March 31, 2017, a decrease of $5.3 million from the $13.8 million outstanding balance at December 31, 2016. The decrease in advances from the Federal Home Loan Bank was due to a $5.0 million borrowing that matured in March 2017 and $300 thousand in regularly scheduled principal payments on the other borrowings.

Total equity at March 31, 2017 was $47.1 million. That represents an increase of $175 thousand, or 0.37%, when compared to the December 31, 2016 balance of $46.9 million. Net income of $115 thousand and the $59 thousand decrease in other comprehensive loss as a result of a decrease in net unrealized loss in the investment portfolio during the three months ended March 31, 2017 were the drivers of the increase in equity.

Asset Quality

We continue to make progress in reducing the levels of non-performing assets. Though asset quality is improving, the level of nonperforming assets remains elevated as we continue to work through foreclosed properties that are held over from the Great Recession and nonaccrual loans. The ratio of nonperforming assets to total assets lowered to 3.73% at March 31, 2017 as compared to 3.79% at December 31, 2016. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, were $24.1 million at March 31, 2017 and December 31, 2016, respectively. The makeup of these assets is primarily loans secured by commercial real estate, residential mortgages, and farmland as well as other real estate owned properties. We continue undertaking extensive and more aggressive measures to work through problem 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. Loans rated substandard decreased $1.7 million, or 9.57%, to $16.6 million at March 31, 2017 from $18.3 million at December 31, 2016 and delinquencies decreased in the first three months of 2017 as total past due loans decreased to $11.7 million at March 31, 2017 from $15.9 million at December 31, 2016, a decrease of $4.2 million, or 26.20%.

Other real estate owned (“OREO”) decreased $494 thousand to $10.2 million at March 31, 2017 from $10.7 million at December 31, 2016. All properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first three months of 2017, we acquired $1.6 million in other real estate owned as a result of settlement of foreclosed loans, which was offset by sales of $2.0 thousand of our properties with gains of $24 thousand realized as a result of the sales. Early in the second quarter of 2017, we divested of one of our largest OREO properties, which had a recorded value of $1.3 million, and another $2.2 million of OREO is under contract as of early May 2017. In an effort to reduce our level of foreclosed properties, we have taken an aggressive approach toward liquidating properties by making pricing adjustments and holding auctions on several of our older properties. We expect to continue these efforts during 2017 which could result in additional losses, while reducing future carrying costs. We do have lease agreements on certain OREO properties which are generating rental income at market rates. Rental income on OREO properties was $55 thousand for the first three months of 2017, a decrease of $12 thousand, or 17.91%, when compared to the $67 thousand recognized in the first three months of 2016.

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Our allowance for loan losses at March 31, 2017 was $6.0 million, or 1.25% of total loans as compared to $6.1 million, or 1.30% of total loans at December 31, 2016. Impaired loans decreased $888 thousand, or 6.17%, to $13.5 million with an estimated related allowance of $638 thousand for potential losses at March 31, 2017 as compared to $14.4 million in impaired loans with an estimated related allowance of $552 thousand at the end of 2016. No provision for loan losses was recorded during first three months of 2017 or 2016. In the first three months of 2017, net charge offs were $104 thousand, or 0.09% of average loans, as compared to $274 thousand, or 0.25% of average loans, in the same period of 2016. 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 March 31, 2017, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The following ratios existed at March 31, 2017 for the Bank: Tier 1 leverage ratio of 9.73%, Tier 1 risk based capital ratio of 14.94%, Total risk based capital ratio of 16.19%, and Common Equity Tier 1 ratio of 14.94%. The ratios were as follows at December 31, 2016: Tier 1 leverage ratio of 9.93%, Tier 1 risk based capital ratio of 15.39%, Total risk based capital ratio of 16.64%, and Common Equity Tier 1 ratio of 15.39%.

The ratios mentioned above for the 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 set out above.

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 $5.3 million existed at March 31, 2017 and December 31, 2016. At March 31, 2017 and December 31, 2016, we had a valuation allowance of $5.3 million. As of March 31, 2017, the Company had $18.5 million of net operating loss carryforwards which will expire in 2031 thru 2037. 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.

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Capital Resources

Our total capital at the end of the first quarter 2017 was $47.1 million compared to $46.9 million at December 31, 2016. The increase was $175 thousand, or 0.37%. The Bank was well capitalized as of March 31, 2017, as defined by the regulatory capital guidelines. New Peoples equity as a percentage of total assets was 7.27% at March 31, 2017 compared to 7.40% at December 31, 2016. The tangible book value per common share was $2.02 at March 31, 2017 compared to $2.01 at December 31, 2016.

Total assets increased during the first quarter of 2017 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and the core deposit base of the Bank. Under current economic conditions, we believe it is prudent to continue to increase capital to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates further. Based upon projections, we believe our current capital levels will be sufficient to support the Bank’s planned asset growth.

No cash dividends have been paid historically and we do not anticipate paying a cash dividend in the foreseeable future as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable.

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 $102.3 million at March 31, 2017, an increase from $94.2 million at December 31, 2016. A surplus of short-term assets are maintained at levels management deems adequate to meet potential liquidity needs during 2017.

At March 31, 2017, all of our investments are classified as available-for-sale. These investments provide an additional source of liquidity in the amount of $62.6 million, which is net of the $9.4 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Total investments increased $2.0 million, or 2.86%, to $72.0 million at March 31, 2017 from $70.0 million at December 31, 2016. An $89 thousand increase in the fair market value of the investment portfolio during the 1 ^st quarter of 2017 resulted in a net unrealized loss of $602 thousand at March 31, 2017 compared to the net unrealized loss of $691 thousand at December 31, 2016.

Our loan to deposit ratio was 83.19% at March 31, 2017 and 84.52% at December 31, 2016. We anticipate this ratio to remain at or below 85% in the near future.

Available third-party sources of liquidity at March 31, 2017 include the following: a line of credit with the Federal Home Loan Bank of Atlanta, access to brokered certificates of deposit markets and 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 federal funds line of credit facility with a correspondent bank had been reinstated. In February 2016, we received notification that this facility had been increased to $5.0 million. In March 2016, we received notification that another correspondent bank had reinstated an unsecured federal funds line of credit facility in the amount of $5.0 million. As a result we had the ability to borrow $10.0 million in unsecured federal funds as of March 31, 2017, which gives us an additional source of liquidity.

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At March 31, 2017, we had borrowings from the Federal Home Loan Bank (“FHLB”) totaling $8.5 million as compared to $13.8 million at December 31, 2016. The decrease of $5.3 million was due to a $5.0 million borrowing that matured in March 2017 and $300 thousand in regularly scheduled principal payments on the other borrowings. None of the FHLB advances are overnight borrowings and therefore none of the advances is subject to daily interest rate changes. At March 31, 2017, $1.5 million of these borrowings had fixed interest rates with an average yield of 4.07%, and a maturity date in 2018. In June 2016 the Bank borrowed $2.0 million with a maturity date in the year 2019 and $5.0 million with a maturity date in the year 2021. Both borrowings have fixed interest rates and interest is payable monthly, with an interest rate of 0.99% on the $2.0 million borrowing and an interest rate of 1.38% on the $5.0 million borrowing.

We also used our line of credit with the FHLB to issue a letter of credit for $7.0 million in 2013 and letters of credit totaling $5.0 million in 2015 to the Treasury Board of Virginia for collateral on public funds. An additional $130.9 million was available on March 31, 2017 on the $151.4 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 Certificate of Deposit Registry Service (“CDARS”) time deposits, we have no other brokered deposits. In February 2016, our ability to participate in CDARS one way buys was reinstated. As of March 31, 2017 we had $1.6 million in CDARS one way buys outstanding.

We are a member of an internet certificate of deposit network whereby we may purchase 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.

With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has 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, etc., some of which are beyond our control.

The bank holding company has $651 thousand in cash on deposit at the Bank as of March 31, 2017. These funds will be used to pay operating expenses, trust preferred interest payments, and provide additional capital injections to the Bank, if needed. The Company is making quarterly interest payments on the trust preferred securities.

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. 1,000 warrants were exercised during the first three months of 2017 and the number of warrants outstanding at March 31, 2017 was 880,978. If these warrants are exercised, additional funds will be received by the Company, which provides potentially up to $1.5 million in additional liquidity and capital to the holding company.

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Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the quarter ended March 31, 2017 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, 2016.

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 March 31, 2017 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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Part II Other Information

Item 1.

Legal Proceedings

In the course of operations, we may become a party to 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, except for the following:

On June 24, 2015 New Peoples Bank filed an Amended Complaint in the Circuit Court of Russell County, Virginia against Arthur Wayne Bostic, Michael W. Bostic, Sr. and Jeffrey C. Bostic to enforce guarantees of loans made to Bostic Ford Sales, Inc. and seeking judgment against the guarantors for $1,427,709.76 with interest and legal fees. On July 24, 2015 Arthur Bostic filed a counterclaim against the Bank. On March 8, 2016 Michael Bostic, Sr., and Jeffrey Bostic filed their counterclaims against the Bank. The counterclaims assert lender liability theories of recovery and arise from the refusal of the Bank to continue to extend credit to Bostic Ford Sales, Inc. in 2008-2009. The defendants seek a judgment against the Bank of at least $3 million. On December 16, 2016 the Court entered an Order sustaining New Peoples’ demurrers to the counterclaims filed by all three defendants and providing the defendants an opportunity to amend their counterclaims. On December 23, 2016, the defendants filed amended counterclaims seeking a judgment against the Bank of at least $3 million. Following the entry of the Court’s Order on December 16, 2016, the parties began certain discussions to narrow the issues in dispute and facilitate settlement.

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.

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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: May 15, 2017

By: /s/ JOSEPH D. PENNINGTON

Joseph D. Pennington

Senior Vice President and Chief Financial Officer

Date: May 15, 2017

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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).
10.11*	Employment Agreement dated December 1, 2016 between New Peoples Bankshares, Inc., New Peoples Bank, Inc., and C. Todd Asbury (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 2, 2016).
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 March 31, 2017, 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.