U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2003
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number: 0-33411
NEW PEOPLES BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 31-1804543
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 Gent Drive
Honaker, Virginia 24260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (276) 873-6288
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
6,898,003 shares of common stock, par value $2.00 per share,
outstanding as of August 1, 2003
1
NEW PEOPLES BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Six Months
Ended June 30, 2003 and 2002 (Unaudited) 2
Consolidated Statements of Income - Three Months
Ended June 30, 2003 and 2002 (Unaudited) 3
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002 (Audited) 4
Consolidated Statements of Changes in Stockholders' Equity -
Six Months Ended June 30, 2003 and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
2
Part I Financial Information
Item 1 Financial Statements
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Interest Income
Loans including fees $ 9,181,146 $ 7,946,795
Federal funds sold 79,915 57,844
Investments 209,907 91,152
---------- ----------
Total Interest Income 9,470,968 8,095,791
---------- ----------
Interest Expense
Interest on deposits 3,263,450 3,004,607
---------- ----------
Net Interest Income 6,207,518 5,091,184
Provision for Loan Losses 334,000 278,000
---------- ----------
Net Interest Income After Provision for Loan Losses 5,873,518 4,813,184
---------- ----------
Noninterest Income
Service charges 396,475 290,831
Fees and commissions and other income 187,219 148,755
Life insurance investment income 229,312 226,150
---------- ----------
Total Noninterest Income 813,006 665,736
---------- ----------
Noninterest Expense
Salaries and employee benefits 2,876,250 1,981,447
Occupancy expense 818,932 497,383
Other operating expenses 1,180,969 1,156,241
---------- ----------
Total Noninterest Expenses 4,876,151 3,635,071
---------- ----------
Income Before Income Taxes 1,810,373 1,843,849
Income Tax Expense 605,914 647,647
---------- ----------
Net Income $ 1,204,459 $ 1,196,202
========== ==========
Net Income Per Share (Basic and Diluted) $ 0.18 $ 0.20
======== =========
Weighted Average Shares Outstanding
Basic 6,849,628 6,000,000
Diluted 6,919,458 6,068,683
The accompanying notes are an integral part of these statements.
3
Part I Financial Information
Item 1 Financial Statements
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Interest Income
Loans including fees $ 4,719,770 $ 4,063,824
Federal funds sold 51,991 15,191
Investments 66,517 46,646
---------- ----------
Total Interest Income 4,838,278 4,125,661
---------- ----------
Interest Expense
Interest on deposits 1,597,130 1,429,205
---------- ----------
Net Interest Income 3,241,148 2,696,456
Provision for Loan Losses 174,000 148,000
---------- ----------
Net Interest Income After Provision for Loan Losses 3,067,148 2,548,456
---------- ----------
Noninterest Income
Service charges 213,622 159,223
Fees and commissions and other income 110,922 87,235
Life insurance investment income 115,338 120,742
---------- ----------
Total Noninterest Income 439,882 367,200
---------- ----------
Noninterest Expense
Salaries and employee benefits 1,526,816 1,080,451
Occupancy expense 504,442 261,834
Other operating expenses 576,301 599,088
---------- ----------
Total Noninterest Expenses 2,607,559 1,941,373
---------- ----------
Income Before Income Taxes 899,471 974,283
Income Tax Expense 306,370 357,183
---------- ----------
Net Income $ 593,101 $ 617,100
========== ==========
Net Income Per Share (Basic and Diluted) $ 0.09 $ 0.10
======== =========
Weighted Average Shares Outstanding
Basic 6,898,003 6,000,000
Diluted 6,967,620 6,064,000
The accompanying notes are an integral part of these statements.
4
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 10,538,877 $ 8,815,523
Federal funds sold 7,432,000 6,123,000
----------- -----------
Total Cash and Cash Equivalents 17,970,877 14,938,523
Securities held to maturity, fair value
of $ 37,006,000 at June 30, 2003 and
$34,356,811 at December 31, 2002 36,975,600 34,304,596
Loans, net of allowance for loan losses
of $2,509,919 at June 30, 2003, and
$2,224,487 at December 31, 2002 248,431,614 220,170,411
Bank premises and equipment, net 12,444,585 10,915,165
Federal Reserve Bank and FHLB stock (restricted) 1,310,250 538,950
Accrued interest receivable 1,967,085 1,846,231
Life insurance investments 8,198,270 7,987,882
Other assets 963,926 696,555
----------- -----------
Total Assets $328,262,207 $291,398,313
=========== ===========
LIABILITIES
Deposits:
Demand deposits:
Noninterest bearing $ 27,743,015 $ 22,379,395
Interest bearing 10,009,846 9,711,423
Savings deposits 34,148,824 27,125,922
Time deposits 223,897,960 204,588,711
----------- -----------
Total Deposits 295,799,645 263,805,451
Accrued interest payable 615,857 702,260
Accrued expenses and other liabilities 691,943 409,374
----------- -----------
Total Liabilities 297,107,445 264,917,085
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $2 par value; 12,000,000
shares authorized;
6,898,003 shares issued and outstanding 13,796,006
6,008,393 shares issued and outstanding 12,016,786
Paid-in-surplus 13,049,260 5,948,505
Stock subscriptions 5,410,900
Retained earnings 4,309,496 3,105,037
----------- -----------
Total Stockholders' Equity 31,154,762 26,481,228
----------- -----------
Total Liabilities and Stockholders' Equity $328,262,207 $291,398,313
=========== ===========
The accompanying notes are an integral part of these statements.
5
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Common Paid in Stock Retained
Stock Surplus Subscriptions Earnings Total
--------- --------- ----------- ------------ -----------
Balance, December 31, 2001 $12,000,000 $ 5,964,331 $ $ 926,743 $18,891,074
Net Income 1,196,202 1,196,202
---------- ---------- ----------- --------- -----------
Balance June 30, 2002 $12,000,000 $ 5,964,331 $ $2,122,945 $20,087,276
========== ========== =========== ========= ==========
Balance, December 31, 2002 $12,016,786 $ 5,948,505 $ 5,410,900 $3,105,037 $26,481,228
Common Stock Subscribed 3,435,200 3,435,200
Stock Options Exercised 10,000 27,500 37,500
Common Stock Issued 1,769,220 7,076,880 (8,846,100) 0
Cost of Common Stock
Offering (3,625) (3,625)
Net Income 1,204,459 1,204,459
-------- -------- ---------- --------- ---------
Balance June 30, 2003 $13,796,006 $ 13,049,260 $ 0 $4,309,496 $31,154,762
========== =========== ========== ========= ==========
The accompanying notes are an integral part of these statements.
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Operating Activities:
Net income $ 1,204,459 $ 1,196,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 334,000 278,000
Net amortization on securities 309,690 0
Depreciation 523,909 401,167
Income from life insurance contracts (
net of expenses) (210,388) (276,130)
Net change in:
Interest receivable (120,854) 145,257
Other assets (267,371) (341,773)
Accrued expense and other liabilities 196,166 (503,983)
---------- ----------
Net Cash Provided by Operating Activities 1,969,611 898,740
---------- ----------
Investing Activities:
Payments for the purchase of property (2,053,329) (1,303,403)
Net change in loans (28,595,203) (23,385,440)
Purchase of securities held to maturity (18,980,694) 3,498,520
Maturity of securities held to maturity 16,000,000
Purchase of Federal Reserve Bank stock (66,000)
Purchase of FHLB stock (705,300)
---------- ----------
Net Cash Used in Investing Activities (34,400,526) (21,190,323)
----------- -----------
Financing Activities:
Net change in:
Demand and saving deposits 12,684,945 9,958,948
Time deposits 19,309,249 8,504,833
Net proceeds from common stock offering 3,431,575
Common stock options exercised 37,500
---------- ----------
Net Cash Provided by Financing Activities 35,463,269 18,463,781
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents 3,032,354 (1,827,802)
Cash and Cash Equivalents, Beginning of Period 14,938,523 11,547,163
---------- ----------
Cash and Cash Equivalents, End of Period $17,970,877 $ 9,719,361
========== ==========
Supplemental Disclosure of Cash Paid:
Interest $ 3,349,853 $ 3,152,248
Income Taxes $ 625,000 $ 620,000
The accompanying notes are an integral part of these statements.
7
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The financial statements conform to U.S. generally accepted
accounting principles and to general industry practices. In the
opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2003, and the results of operations for the
six and three month periods ended June 30, 2003 and 2002. The notes
included herein should be read in conjunction with the notes to
financial statements included in the 2002 annual report to
shareholders of New Peoples Bankshares, Inc. The results of
operations for the six and three month periods ended June 30, 2003 and
2002 are not necessarily indicative of the results to be expected for
the full year.
The Company does not expect the anticipated adoption of any newly
issued accounting standards to have a material impact on future
operations or financial position.
NOTE 2 SECURITIES HELD TO MATURITY:
The amortized cost and estimated fair value of securities held to
maturity are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 2003
U.S. Government Agency $36,873,953 $ 25,047 $ $36,899,000
State, County &
Municipal 101,647 5,353 107,000
---------- -------- --------- ---------
Total Securities Held to
Maturity $36,975,600 $ 30,400 $ $37,006,000
========== ======== ======== ==========
December 31, 2002
U.S. Government Agency $34,203,529 $ 56,916 $ 10,613 $34,249,832
State, County &
Municipal 101,067 5,912 106,979
---------- -------- -------- ----------
Total Securities Held
to Maturity $34,304,596 $ 62,828 $ 10,613 $34,356,811
========== ======== ======== ==========
NOTE 3 LOANS:
Loans receivable outstanding are summarized as follows: (Rounded to
the nearest thousand.)
June 30, December 31,
2003 2002
Commercial, financial and agricultural $112,237,000 $93,746,000
Real estate - construction 5,558,000 5,615,000
Real estate mortgage - 1-4 family
residential 88,464,000 80,264,000
Installment loans to individuals 44,683,000 42,770,000
---------- ----------
Loans Receivable $250,942,000 $222,395,000
=========== ===========
8
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
Transactions in the Company's allowance for loan losses are shown in
the following schedule:
For the Three Months EndedFor the Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------- ---------- ---------- ------------
Balance, beginning
of period $2,342,232 $1,898,150 $2,224,487 $1,792,850
Provision for loan
losses 174,000 148,000 334,000 278,000
Charge-offs (15,416) (23,800) (63,636) (71,778)
Recoveries 9,103 3,978 15,068 27,056
-------- -------- -------- --------
Balance, End of
Period $2,509,919 $2,026,128 $2,509,919 $2,026,128
========= ========= ========= =========
NOTE 5 COMMON STOCK:
Beginning October 15, 2002, 1,200,000 shares of common stock were
offered for sale by means of a prospectus to existing shareholders
and to the general public in the states of Virginia, West Virginia and
Tennessee only. The sale ended on February 7, 2003, after one 30 day
extension from the original sale period. The total number of shares
sold under the offering were 890,469 resulting in total gross
proceeds to the Company of $8,904,690.
NOTE 6 STOCK OPTION PLAN:
The Company has a stock-based compensation plan under which the
Company can issue options, up to a maximum of 900,000 shares, to
directors and employees to purchase common stock. Under the Plan, the
exercise price may not be less than 100% of the fair market value of
the shares on the award date. The options become vested and exercisable
on the date of the grant. The stock option plan is more fully described
in note 13 to the December 31, 2002 consolidated financial statements.
The Company awarded options to acquire 286,000 shares on December
12, 2001 and 79,500 shares on January 1, 2003. The options expire ten
years from the date of the award. The fair value of each option granted
on January 1, 2003, was $3.30 using the Black Scholes Option Pricing
method with the following assumptions: risk free interest rate - 4.01%,
expected life - 10 years, expected volatility - zero and expected
dividends - zero.
Outstanding options as of June 30, 2003 are as follows:
Exercise
Date of Grant Price Outstanding
December 12, 2001 7.50 278,466
January 1, 2003 10.00 79,500
9
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 STOCK OPTION PLAN (CONTINUED):
The Company accounts for the plan under the recognition and
measurement principles of APB No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No Stock-based employee
compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to the
stock option plan. No compensation cost would be recognized under FASB
Statement No. 123 during the year 2002.
Three Months Ended Six Months Ended
June 30, March 31, June 30,
2003 2003 2003
---- ---- ----
Net income, as reported $ 593,101 $ 611,358 $ 1,204,459
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method 0 (262,350) (262,350)
---------- --------- ----------
Pro Forma Net Income $ 593,101 $ 349,008 $ 942,109
========== ========= ==========
Net Income per Share:
Basic & Diluted
As reported $ .09 $ .10 $ .18
========== ========= ==========
Pro forma $ .09 $ .05 $ .14
========== ========= ==========
NOTE 7 EARNINGS PER SHARE:
Diluted earnings per share have been calculated to reflect the
dilutive effect of the exercisable outstanding options granted to
employees and directors of the Company. The dilution calculation
assumes that all options were exercised at the beginning of the period
and that the proceeds were used to purchase common stock at the average
market price during the period.
NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2002, the FASB issued FAS 148, "Accounting for
Stock-Based Compensation." This new standard provides alternative
methods of transition for a voluntary change to the fair value method
of accounting for stock-based compensation. In addition, the Statement
amends the disclosure requirements of FAS 123 to require prominent
disclosure in both annual and interim financial statements about the
method of accounting for stock-based compensation and the underlying
effect of the method used on reported results until exercised. The
Company plans to continue to use the intrinsic value method in
accordance with APB 25. The disclosures required by FAS 148 are shown
above in Note 6.
10
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In April 2003, FASB issued FAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This new
standard amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred
to as derivatives) and for hedging activities FAS 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement is
effective for contracts entered into or modified after June 30, 2003.
Adoption of this statement is not expected to have a material effect on
the Company.
In April 2003, FASB issued FAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This new statement establishes standards for how an issuer
classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is (1) issued in the
form of shares that is mandatorily redeemable, (2) at inception
embodies an obligation to repurchase the issuer's equity, or is indexed
to such an obligation, and that requires or may require the issuer to
settle the obligation by transferring assets, or (3) embodies an
unconditional obligation, or a financial instrument other than an
outstanding share that embodies a conditional obligation, that the
issuer must or may settle by issuing a variable number of its equity
shares provided certain conditions are met; as a liability (or asset in
some circumstances). FAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. Adoption of this statement is not expected to have a material
effect on the Company.
11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
The following discussion contains statements that refer to future
expectations, contain projections of the results of operations or of financial
condition or state other information that is "forward-looking."
"Forward-looking" statements are easily identified by the use of words such as
"could," "could anticipate," "estimate," "believe," and similar words that refer
to the future outlook. There is always a degree of uncertainty associated with
"forward-looking" statements. The Company's management believes that the
expectations reflected in such statements are based upon reasonable assumptions
and on the facts and circumstances existing at the time of these disclosures.
Actual results could differ significantly from those anticipated.
Many factors could cause the Company's actual results to differ materially
from the results contemplated by the forward-looking statements. Some factors,
which could negatively affect the results, include:
o General economic conditions, either nationally or within the
Company's markets, could be less favorable than expected;
o Changes in market interest rates could affect interest margins
and profitability;
o Competitive pressures could be greater than anticipated; and
o Legal or accounting changes could affect the Company's results.
Overview
New Peoples Bankshares, Inc. ("Company") is a financial holding company,
which owns 100% of New Peoples Bank, Inc. ("Bank"). In May of 2003, the
Company formed two new subsidiaries: NPB Financial Serivces, Inc., which will
provide insurance and investment products, and NPB Web Services, Inc., which
will provide Web site development and maintenance for customers of the Bank.
We anticipate that the new entities will begin operations during 2003.
The Bank opened for business on October 28, 1998 and has achieved
outstanding growth. As of June 30, 2003, the Bank had total deposits of
$295,799,645 and total loans of $250,941,533.
Our net income for the six months ended June 30, 2003 was $1,204,459
compared with income of $1,196,202 for the six months ended June 30, 2002. Net
income per share was $.18 compared with $.20 for the prior period. The decrease
in earnings per share is attributed to the increased number of shares
outstanding after the recent sale of common stock.
Our net income for the quarter ended June 30, 2003 was $593,101 compared
with $611,358 for the first quarter of 2003 and $617,100 for the quarter ended
June 30, 2002. The decrease in net income is mainly attributed to the decrease
in our net interest margin for the quarter. Net income per share was $.09
compared with $.09 for the first quarter of 2003 and $.10 for the quarter ended
June 30, 2002.
For the foreseeable future, management will continue its strategy of
providing personal and customized financial services to individuals, small to
medium size businesses and the professional community. The Bank will strive to
serve the banking needs of its customers by developing personal, hometown
relationships.
Net Interest Income and Net Interest Margin
Our net interest income, which equals total interest and dividend income
less total interest expense, increased from $5,091,184 for the first six months
of 2002 to $6,207,518 for the first six months of 2003. The increase was the net
result of higher average balances and a 53 basis point decrease in the net
interest margin.
12
Net Interest Income and Net Interest Margin (Continued)
The net interest margin on earning assets, which equals net interest income
divided by total interest earning assets was 4.56% for the first six months of
2003 and 5.09% for the first six months of 2002. Interest rates were lower
during the first six months of 2003 compared with the same period in 2002 in
response to interest rate cuts by the Federal Reserve Bank. The average yield on
earning assets decreased 110 basis points and the average cost of funds
decreased 58 basis points resulting in the decrease in the net interest margin.
Because of a strong loan demand, the Bank was able to maintain the yield on
loans at 7.96% during the current period compared with 8.36% for the prior
period. The Bank continues to offer attractive loan and deposit rates in order
to attract new customers. Table I below shows the rates paid on earning assets
and deposit liabilities.
The net interest margin for the second quarter of 2003 was 4.63% compared
with 5.31 % for the second quarter of 2002. The trend in interest rates during
the second quarter of 2003 was consistent with the decreases experienced during
the first quarter of 2002.
Provision for Loan Losses
The provision for loan losses for the first six months of 2003 was $334,000
compared with $278,000 for the same period of 2002. Loan charge-offs for the
first six months of 2003 were $63,636 and recoveries were $15,068 resulting in
an allowance for loan losses of $2,509,919 at June 30, 2003 (approximately 1% of
total loans).
Our provision for loan losses for the second quarter of 2003 was $174,000
compared to $148,000 for the second quarter of 2002. Net loan charge-offs for
the second quarter of 2003 were $6,313.
The calculation of the allowance for loan losses is considered a critical
accounting policy. Although we have experienced lenders who are familiar with
their customer base, most loans are too new to have exhibited signs of weakness
and the bank does not have an adequate history of loan losses to develop
accurate risk factors. In calculating the amount of the allowance for loan
losses we use guidelines that have been traditionally recommended by the bank
regulatory agencies. At each balance sheet date, we adjust the allowance to
equal the larger of 1% or an amount calculated by multiplying a loss factor
times the amount of loans in each risk classification pool. The pools and
loss factors used in this calculation are as follows: loss-100%, doubtful-50%,
substandard-10%, special mention-1%, pass-.5%. In addition we consider current
economic conditions, changes in the nature and volume of the loan portfolio, and
known adverse factors that may affect the borrowers ability to repay. We intend
to continue to set the allowance at a minimum of 1% unless there is a clear
indication that a 1% allowance is not appropriate.
As the loan portfolio matures, a loss rate specific to us will emerge and
these loss percentages will be applied to the loan portfolio. This will result
in a more accurate allowance for loan loss calculation that is tailored to
reflect the risk associated with our loan portfolio.
The allowance for loan losses represents management's best estimate of the
probable loan losses incurred as of each balance sheet date.
Loan officers initially risk rate the loans and a loan processor reviews the
risk rating for appropriateness. In addition, a credit analyst reviews all loans
in excess of $500,000 to one borrower. We also have a loan review team that
reviews a sample of new loans for compliance, collectibility and risk rating. On
a continuous basis, we downgrade loans if necessary based on recommendations of
loan officers, review of past due loans, and recommendations
of examiners and auditors.
Noninterest Income
Noninterest income increased from $665,736 in the first six months of 2002
to $813,006 in the first six months of 2003. The increase in service charges,
fees and commissions is consistent with the growth in average assets of the
Bank. Noninterest income as a percentage (annualized) of average assets was .53%
for the first six months of 2003 compared to .59% for the first six months of
2002.
13
Noninterest Income (Continued)
Noninterest income increased from $367,200 in the second quarter of 2002 to
$439,882 for the second quarter of 2003. The increase in service charges, fees
and commissions is consistent with the growth in average assets of the Bank.
Noninterest income as a percentage (annualized) of average assets was .59 % for
the second quarter of 2003 compared with .64% for the second quarter of 2002.
Noninterest Expense
Noninterest expense increased from $3,635,071 in the first six months of
2002 to $4,876,151 in the first six months of 2003. The increase was due to
additional staffing and expenses associated with the new branches opened and the
general growth in operations. Noninterest expense as a percentage (annualized)
of average assets was 3.19% for the first six months of 2003 compared to 3.24%
for the first six months of 2002.
Noninterest expense increased from $1,941,373 in the second quarter of 2002
to $2,607,559 for the second quarter of 2003. Noninterest expense as a
percentage (annualized) of average assets was 3.31% for the second quarter of
2003 compared with 3.41% for the second quarter of 2002.
Investment Securities
Total investment securities increased from $34,304,396 at December 31, 2002
to $36,975,600 at June 30, 2003. We had no Available For Sale securities at June
30, 2003 and December 31, 2002. At those dates, we believed that we had adequate
liquidity in the form of other assets, including federal funds sold. In
addition, the Securities Held to Maturity held at those dates generally had
short contractual maturities and would have been available for liquidity
purposes if necessary. See additional discussion of liquidity below.
Our practice has been to invest available funds in short term U.S. Treasury
and Agency securities, which reduce the percentage of the bank's capital that is
subject to the Virginia bank franchise tax. The amount invested fluctuates from
period to period depending on the funds available and projected liquidity
needs. During the first six months of 2003, Securities Held to Maturity with a
face value of $16,000,000 were replaced with similar short-term Securities Held
to Maturity.
Loans
Total loans have increased $28,547,000 during the first six months of 2003
to $250,942,000 due to strong loan demand and customers at our new branches.
Approximately 66% of the loan portfolio is secured by real estate.
Loans receivable outstanding are summarized as follows:
Loan Portfolio
(In Thousands)
June 30, December 31,
2003 2002
Commercial, financial and agricultural $ 112,237 $ 93,746
Real estate - construction 5,558 5,615
Real estate mortgage - 1-4 family residential 88,464 80,264
Installment loans to individuals 44,683 42,770
--------- ---------
Loans Receivable $ 250,942 $ 222,395
========= =========
14
Loan Portfolio Risks
Nonaccrual and past due loans are shown in the following schedule.
Management has not identified any additional loans as "troubled debt
restructurings" or "potential problem loans."
June 30, December 31,
2003 2002
Principal: (In Thousands)
Nonaccrual and past due loans:
Nonaccruing loans $ 43 $ 40
Loans past due 90 days or more
and still accruing 19 19
----- -----
Total $ 62 $ 59
===== =====
Percent of total loans 0.02% 0.03%
Investment in Federal Home Loan Bank of Atlanta
During 2003, the Bank purchased common stock issued by the Federal Home Loan
Bank of Atlanta ("FHLB") of $705,300. The Bank also entered into an agreement
with the FHLB which establishes a $49,000,000 line of credit. Advances under the
line will be secured by a blanket floating lien on the Bank's qualifying real
estate loans. No advances had been made under the line of credit at June 30,
2003.
Bank Premises
At June 30, 2003, we had twelve full service branches, one deposit-taking
branch and two loan production offices.
On April 24, 2003, we opened a full service branch in Grundy, Virginia. We
anticipate that the total cost of the land, building and equipment was
approximately $1,600,000. A Director of the Bank has agreed to purchase the
second floor of the building and six parking spaces for $350,000 for use as a
law office.
On July 2, 2003, we opened a branch in Dungannon, Virginia, in leased
facilities located within the building which houses the Dungannon Post Office.
The monthly lease fee will be approximately $800. It will be operated primarily
as a deposit-taking branch, with two tellers.
Land has been purchased and preliminary construction has begun for a full
service branch in Bloomingdale/Kingsport, Tennessee. It is anticipated that
construction will be completed by late autumn 2003, at an estimated cost of
$800,000.
We will continue to investigate and consider other possible sites that would
enable the Bank to profitably serve its chosen market area. Additional purchases
of premises and equipment for the year 2003 will depend on the decision to open
additional branches.
Deposits
Our deposits increased $31,994,194 during the first six months of 2003 to
$295,799,645 at June 30, 2003 due to customers at our new branches. A schedule
of deposits by type is shown in the balance sheet. Time deposits of $100,000 or
more equaled 20.6% of total deposits at June 30, 2003 and 20.0% at December 31,
2002. We do not have brokered deposits and internet accounts are limited to
customers in the surrounding geographical area. A maturity schedule of deposits
is included in Table II below.
15
Capital
Capital as a percentage of total assets was 9.49% at June 30, 2003, which
exceeded regulatory requirements.
Beginning October 15, 2002, 1,200,000 shares of common stock were offered
for sale by means of a prospectus to existing shareholders and to the general
public in the states of Virginia, West Virginia and Tennessee only. The sale
ended on February 7, 2003, after one 30 day extension from the original sale
period. The total number of shares sold under the offering were 890,469,
resulting in total gross proceeds of $8,904,690.
Liquidity
We had liquid assets of approximately $44.0 million at June 30, 2003 in the
form of cash and due from banks, federal funds sold and investments maturing
within 90 days. We believe that our liquid assets were adequate at June 30,
2003. In the event that we need additional funds, we have the ability to
purchase federal funds under established lines of credit of $3.5 million and to
borrow from the FHLB under a $49 million line of credit. Additional liquidity
will be provided by the future growth that management expects in deposit
accounts and loan repayments. We believe that this future growth will result
from an increase in market share in our targeted trade area. The maturity of our
interest earning assets and interest bearing deposits is shown in Table II
below.
Employees
The Company's full time equivalent employees have increased from 145 at
December 31, 2002 to 169 at June 30, 2003. Future increases in the number of
employees will depend on the selection and approval of new branches.
16
Table I
NEW PEOPLES BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
AVERAGE BALANCE SHEET
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of dollars)
---------------- 2003 --------- ------------- 2002 -----------
Average Average Average Average
Balance Income/ Rates Balance Income/ Rates
Sheet Expense Earned/Paid Sheet Expense Earned/Paid
ASSETS
Loans including fees (1) $237,127 $ 9,181 7.96% $190,106 $ 7,947 8.36%
Federal Funds sold 14,217 80 1.14% 6,870 58 1.69%
Other investments 26,571 210 1.60% 3,070 91 5.93%
------- ------- ------- -------
Total Earning Assets 277,915 9,471 6.99% 200,046 8,096 8.09%
------- -------
Allowance for loans
losses (2,359) (1,890)
Non-earning assets 30,637 26,483
------- -------
Total Assets $306,193 $224,639
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - Interest
bearing $ 16,683 $ 96 1.17% $ 12,596 $ 94 1.51%
Savings 24,878 186 1.52% 17,265 169 1.96%
All other time deposits 207,402 2,981 2.92% 155,508 2,741 3.53%
--------- ------- --------- -------- ----
Total Deposits 248,963 3,263 2.66% 185,369 3,004 3.24%
------- -------
Non-interest bearing
deposits 31,814 18,329
Other liabilities 1,329 1,313
------- -------
Total Liabilities $282,106 $205,011
Stockholders' Equity 24,087 19,628
------- -------
Total Liabilities and
Stockholders' Equity $306,193 $224,639
======= =======
Net Interest Earnings $ 6,208 $ 5,091
======= =======
Net Yield on Interest
Earning Assets 4.56% 5.09%
===== ======
(1) Nontaxable interest income is insignificant and treated as taxable in
the above analysis.
17
Table I
NEW PEOPLES BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
AVERAGE BALANCE SHEET
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of dollars)
---------------- 2003 ------------- --------------- 2002 -------------
Average Average Average Average
Balance Income/ Rates Balance Income/ Rates
Sheet Expense Earned/Paid Sheet Expense Earned/Paid
ASSETS
Loans including fees (1) $245,132 $ 4,720 7.95% $196,625 $ 4,064 8.27%
Federal Funds sold 18,986 52 1.10% 3,445 15 1.74%
Other investments 21,780 66 1.23% 2,885 47 6.52%
------- ------- ------- -------
Total Earning Assets 285,898 4,838 6.96% 202,955 4,126 8.13%
------- -------
Allowance for loans losses (2,435) (1,954)
Non-earning assets 31,393 27,025
------- -------
Total Assets $314,856 $228,026
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - Interest bearing $ 17,306 $ 50 1.16% $ 17,091 $ 69 1.61%
Savings 26,408 99 1.52% 14,700 73 1.99%
All other time deposits 210,988 1,448 2.78% 155,665 1,287 3.31%
--------- ------- -------- ------- ----
Total Deposits $254,702 1,597 2.54% $ 187,456 1,429 3.05%
-------- --------- ------
Non-interest bearing deposits 34,272 19,443
Other liabilities 1,477 1,156
------- -------
Total Liabilities 290,451 208,055
Stockholders' Equity 24,396 19,971
------- -------
Total Liabilities and
Stockholders' Equity $314,847 $228,026
======= =======
Net Interest Earnings $ 3,241 $ 2,696
======= =======
Net Yield on Interest
Earning Assets 4.63% 5.31%
===== =======
(1) Nontaxable interest income is insignificant and treated as taxable in
the above analysis.
18
Table II
NEW PEOPLES BANKSHARES, INC.
INTEREST SENSITIVITY ANALYSIS
(In thousands of dollars)
June 30, 2003
1-90 91-365 Over 5
Uses of Funds Days Days 2005 2006 2007 2008 Years Total
- ------------- ---- ---- ---- ---- ---- ---- ----- -----
Loans $41,528 $91,084 $ 48,856 $28,322 $19,966 $ 9,717 $ 11,469 $250,942
Federal funds
sold 7,432 7,432
Total investments 31,775 5,703 102 706 38,286
------ ----- ----- ----- ----- ------- -------- -------
Total 80,735 96,787 48,958 29,028 19,966 9,717 11,469 296,660
-------- ------ ------ -------- ------ ----- -------- -------
Sources of Funds
Deposits
Demand and
savings 44,132 44,132
Time deposits
> $100M 48,010 81,434 14,272 7,447 9,573 2,231 162,967
Time deposits
< $100M 17,285 30,732 5,998 3,766 2,329 847 60,957
------- ------ ----- ----- ----- ----- --------- ---------
Total Deposits 109,427 112,166 20,270 11,213 11,902 3,078 268,056
------- -------- ------ -------- ------ ----- ---------- -------
Discrete Gap (28,692) (15,379) 28,688 17,815 8,064 6,639 11,469
Cumulative Gap (28,692) (44,071) (15,383) 2,432 10,496 17,135 28,604 28,604
Ratio of Cumulative
Gap
To Total
Earning Assets -9.67% -14.86% -5.19% 0.82% 3.54% 5.78% 9.64%
December 31, 2002
Ratio of Cumulative
Gap
To Total
Earning Assets -25.51% -34.27% -28.15% -22.09% -17.13% -5.98% 8.33%
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 2003. In preparing the above table, no
assumptions are made with respect to loan prepayments or deposit run offs. Loan
principal payments are included in the earliest period in which the loan matures
or can be repriced. Principal payments on installment loans scheduled prior to
maturity are included in the period of maturity or repricing.
19
Item 3. Market Quantitative and Qualitative Disclosures About Risk
Interest rate risk represents the primary risk factor affecting our balance
sheet and net interest margin. Significant changes in interest rates by the
Federal Reserve could result in similar changes in other interest rates, that
could affect interest earned on our loan and investment portfolios and interest
paid on our deposit accounts.
Our policy objective is to monitor our position and to manage our short term and
long-term interest rate risk exposure. Our board of directors has established
percentages for the maximum potential reductions in net interest income, that we
are willing to accept, which result from changes in interest rates over the next
12-month period. The percentage limitations relate to instantaneous and
sustained changes in interest rates of plus and minus certain basis points.
The following table summarizes our established percentage limitations and the
sensitivity of our net interest income to various interest rate scenarios for
the next 12 months, based on assets and liabilities as of June 30, 2003 and
December 31, 2002. At both dates, our interest rate risk is within the
established limitations.
Immediate Estimated Increase
Basis Point Change (Decrease) in Net Established
In Interest Rates Interest Income Limitation
June 30,December 31,
2003 2002
+300 1.00% (4.67)% (20.00)%
+200 .66 (3.10) (15.00)
+100 .33 (1.55) (7.00)
-100 .13 2.13 (7.00)
-200 (2.27) 4.09 (15.00)
-300 (3.04) 1.95 (20.00)
During the first six months of 2003, we were able to reduce our interest
rate risk for an increasing rate environment by increasing our earning assets
that reprice within one year relative to deposits that will reprice within one
year.
At June 30, 2003, we had a cumulative Gap Rate Sensitivity Ratio (based on
contractual terms) of a negative 14.86% for the one year repricing period
compared with a negative 34.27% at December 31, 2002. This generally indicates
that earnings would improve in a declining interest rate environment as
liabilities reprice more quickly than assets. Conversely, earnings would
probably decrease in periods during which interest rates are increasing.
Management constantly monitors the Company's interest rate risk and has decided
that the current position is an acceptable risk for a growing community bank
operating in a rural environment. Table II in Item 2 above shows the Company's
interest sensitivity by year.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such
as the Company that file periodic reports under the Securities Exchange Act of
1934 (the "Act") are now required to include in those reports certain
information concerning the issuer's controls and procedures for complying with
the disclosure requirements of the federal securities laws. These disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports it files or submits under the Act is communicated to the issuer's
management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
20
Item 4. Controls and Procedures (Continued)
We have established our disclosure controls and procedures to ensure that
material information related to the Company is made known to our principal
executive officers and principal financial officer on a regular basis, in
particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the Chief Executive Officer and the Chief
Financial Officer, and the other executive officers of the Company and its
subsidiaries to identify any new transactions, events, trends, contingencies or
other matters that may be material to the Company's operations. As required, we
will evaluate the effectiveness of these disclosure controls and procedures on a
quarterly basis, and most recently did so as of the end of the period covered by
this report. Based on this evaluation, the Company's management, including the
Chief Executive Officer and the Chief Financial Officer, concluded that such
disclosure controls and procedures were operating effectively as designed as
of the date of such evaluation.
Changes in Internal Controls
We also maintain a system of internal accounting controls that is designed
to provide assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and
properly recorded. This system is continually reviewed and is augmented by
written policies and procedures, and careful selection and training of qualified
personnel. There have been no significant changes to this system of internal
controls or in other factors that could materially affect those controls
subsequent to the date of the Company's evaluation described above.
Part II Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and
Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior
Securities - Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on 8-K -
(a) Exhibits
The following exhibits are filed as part of this Form 10-Q, and this list
includes the exhibit index:
No. Description
3.1 Articles of Incorporation of Registrant (1)
3.2 By Laws of Registrant (1)
99.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
(filed herewith).
99.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
(filed herewith).
21
Item 6. Exhibits and Reports on 8-K (Continued) -
99.3 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
(1) Incorporated by reference to Exhibits to Form 8K filed by New
Peoples Bankshares, Inc. on December 12, 2002
(b) Reports on Form 8-K.
Not Applicable
22
Signature
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.
By: /s/ KENNETH D. HART
--------------------------------
Kenneth D. Hart
President and Chief Executive
Officer
By: /s/ FRANK SEXTON, JR.
----------------------------------
Frank Sexton, Jr.
Executive Vice President and
Cashier
Date: August 13, 2003