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 September 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:
6,903,003 shares of common stock, par value $2.00 per share,
outstanding as of November 1, 2003
1
NEW PEOPLES BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Nine Months
Ended September 30, 2003 and 2002 (Unaudited) 2
Consolidated Statements of Income - Three Months
Ended September 30, 2003 and 2002 (Unaudited) 3
Consolidated Balance Sheets - September 30, 2003 and
December 31, 2002 (Audited) 4
Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 30, 2003 and 2002 (Unaudited) 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
Part I Financial Information
Item 1 Financial Statements
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Interest Income
Loans including fees $14,142,734 $12,232,972
Federal funds sold 150,745 99,781
Investments 279,614 141,482
---------- ----------
Total Interest Income 14,573,093 12,474,235
---------- ----------
Interest Expense
Interest on deposits 4,873,684 4,568,583
---------- ----------
Net Interest Income 9,699,409 7,905,652
Provision for Loan Losses 364,000 476,000
---------- ----------
Net Interest Income After Provision
for Loan Losses 9,335,409 7,429,652
----------- -----------
Noninterest Income
Service charges 657,651 467,820
Fees and commissions and other income 331,732 225,918
Life insurance investment income 315,214 341,488
---------- ----------
Total Noninterest Income 1,304,597 1,035,226
---------- -----------
Noninterest Expense
Salaries and employee benefits 4,482,776 3,140,349
Occupancy expense 1,274,677 796,333
Other operating expenses 1,916,936 1,822,759
---------- ----------
Total Noninterest Expenses 7,674,389 5,759,441
---------- ----------
Income Before Income Taxes 2,965,617 2,705,437
Income Tax Expense 1,000,437 969,889
---------- -----------
Net Income $ 1,965,180 $ 1,735,548
========== ==========
Net Income Per Share
Basic $ .29 $ .29
========== ==========
Diluted $ .28 $ .29
========== ==========
Weighted Average Shares Outstanding
Basic 6,867,047 6,000,000
Diluted 6,936,384 6,067,209
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 SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Interest Income
Loans including fees $4,961,588 $ 4,286,177
Federal funds sold 70,830 41,937
Investments 69,707 50,330
--------- ----------
Total Interest Income 5,102,125 4,378,444
--------- ----------
Interest Expense
Interest on deposits 1,610,234 1,563,976
--------- ----------
Net Interest Income 3,491,891 2,814,468
Provision for Loan Losses 30,000 198,000
--------- ----------
Net Interest Income After Provision for
Loan Losses 3,461,891 2,616,468
---------- ----------
Noninterest Income
Service charges 261,176 176,989
Fees and commissions and other income 144,513 77,163
Life insurance investment income 85,902 115,338
--------- ----------
Total Noninterest Income 491,591 369,490
--------- ----------
Noninterest Expense
Salaries and employee benefits 1,606,526 1,158,902
Occupancy expense 455,745 298,950
Other operating expenses 735,967 666,518
--------- ----------
Total Noninterest Expenses 2,798,238 2,124,370
--------- -----------
Income Before Income Taxes 1,155,244 861,588
Income Tax Expense 394,523 322,242
--------- ----------
Net Income $ 760,721 $ 539,346
========= ==========
Net Income Per Share
Basic $ .11 $ .09
========== ==========
Diluted $ .11 $ .09
========== ==========
Weighted Average Shares Outstanding
Basic 6,901,318 6,000,000
Diluted 6,969,685 6,064,000
The accompanying notes are an integral part of these statements.
4
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 10,360,171 $ 8,815,523
Federal funds sold 5,526,000 6,123,000
----------- -----------
Total Cash and Cash Equivalents 15,886,171 14,938,523
Securities held to maturity, fair value o
$40,842,256 at September 30, 2003 and
$34,356,811 at December 31, 2002 40,830,166 34,304,596
Loans, net of allowance for loan losses of
$2,492,111 at September 30, 2003, and
$2,224,487 at December 31, 2002 266,253,143 220,170,411
Bank premises and equipment, net 13,233,003 10,915,165
Federal Reserve Bank and FHLB stock
(restricted) 1,364,250 538,950
Accrued interest receivable 2,037,280 1,846,231
Life insurance investments 8,267,670 7,987,882
Other assets 800,622 696,555
----------- -----------
Total Assets $348,672,305 $291,398,313
=========== ===========
LIABILITIES
Deposits:
Demand deposits:
Noninterest bearing $ 31,448,169 $ 22,379,395
Interest bearing 18,165,540 9,711,423
Savings deposits 38,501,953 27,125,922
Time deposits 226,850,682 204,588,711
----------- -----------
Total Deposits 314,966,344 263,805,451
Accrued interest payable 588,947 702,260
Accrued expenses and other liabilities 1,164,031 409,374
----------- -----------
Total Liabilities 316,719,322 264,917,085
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $2 par value; 12,000,000
shares authorized; 6,903,003 shares issued
and outstanding 13,806,006
6,008,393 shares issued and outstanding 12,016,786
Paid-in-surplus 13,076,760 5,948,505
Stock subscriptions 5,410,900
Retained earnings 5,070,217 3,105,037
----------- -----------
Total Stockholders' Equity 31,952,983 26,481,228
----------- ------------
Total Liabilities and Stockholders' Equity $348,672,305 $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 NINE MONTHS ENDED SEPTEMBER 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 1,735,548 1,735,548
----------- ------------ ---------- --------- ---------
Balance September 30,
2002 $ 12,000,000 $ 5,964,331 $ $2,662,291 $20,626,622
=========== ========= ========== ========= ==========
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 20,000 55,000 75,000
Common Stock Issued 1,769,220 7,076,880 (8,846,100)
Cost of Common Stock
Offering (3,625) (3,625)
Net Income 1,965,180 1,965,180
----------- ---------- ---------- --------- ---------
Balance September 30,
2003 $ 13,806,006 $ 13,076,760 $ $5,070,217 $31,952,983
=========== ========== ========= ========= ==========
The accompanying notes are an integral part of these statements.
6
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
Operating Activities:
Net income $ 1,965,180 $ 1,735,548
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 364,000 476,000
Net amortization on securities 440,299
Depreciation 805,872 624,282
Income from life insurance contracts
(net of expenses) (279,788) (382,006)
Net change in:
Interest receivable (191,049) 31,614
Other assets (104,067) 105,425
Accrued interest, expenses and other
liabilities 641,345 (28,996)
---------- ----------
Net Cash Provided by Operating Activities 3,641,792 2,561,867
---------- -----------
Investing Activities:
Payments for the purchase of property (3,123,710) (2,387,743)
Net change in loans (46,446,732) 33,903,362)
Purchase of securities held to maturity (65,964,158)
Maturity of securities held to maturity 58,998,288
Purchase of Federal Reserve Bank stock (120,000)
Purchase of FHLB stock (705,300) 11,205,166)
---------- ----------
Net Cash Used in Investing Activities (57,361,612) (47,496,271)
----------- ----------
Financing Activities:
Net change in:
Demand and saving deposits 28,898,922 13,913,733
Time deposits 22,261,971 35,888,519
Net proceeds from common stock offering 3,431,575
Common stock options exercised 75,000
---------- -----------
Net Cash Provided by Financing Activities 54,667,468 49,802,252
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents 947,648 4,867,848
Cash and Cash Equivalents, Beginning of Period 14,938,523 11,547,163
---------- ----------
Cash and Cash Equivalents, End of Period $15,886,171 $16,415,011
========== ==========
Supplemental Disclosure of Cash Paid:
Interest $4,986,997 $ 4,629,444
Income Taxes $ 755,000 $ 969,889
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 September 30,
2003, and the results of operations for the nine and three month
periods ended September 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 nine and three
month periods ended September 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
September 30, 2003
U.S. Government
Agency $ 40,728,743 $ 14,500 $ 7,311 $ 40,735,932
State, County &
Municipal 101,423 4,901 106,324
----------- -------- ------- -----------
Total Securities Held
To Maturity $ 40,830,166 $ 19,401 $ 7,311 $ 40,842,256
=========== ======== ======= ===========
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.)
September 30, December 31,
2003 2002
---- ----
Commercial, financial
and agricultural $120,088,000 $ 93,746,000
Real estate -
construction 6,747,000 5,615,000
Real estate mortgage -
1-4 family residential 95,263,000 80,264,000
Installment loans to
individuals 46,647,000 42,770,000
----------- -----------
Loans Receivable $268,745,000 $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 Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
--------- ---------- -------- --------
Balance, beginning
of period $2,509,919 $2,026,128 $2,224,487 $1,792,850
Provision for loan
losses 30,000 198,000 364,000 476,000
Charge-offs (49,906) (100,223) (113,542) (172,001)
Recoveries 2,098 5,899 17,166 32,955
-------- --------- --------- --------
Balance, End of
Period $2,492,111 $2,129,804 $2,492,111 $2,129,804
========= ========= ========= =========
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 September 30, 2003 are as follows:
Exercise
Date of Grant Price Outstanding
December 12, 2001 7.50 273,466
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 Nine Months Ended
September 30,September 30,September 30,September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 760,721 $ 539,346 $1,965,180 $1,735,548
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method (262,350)
-------- -------- -------- --------
Pro Forma Net Income $ 760,721 $ 539,346 $1,702,830 $1,735,548
======== ======== ========= =========
Net Income per Share:
Basic
As reported $ .11 $ .09 $ .29 $ .29
========= ======== ======== ========
Proforma $ .11 $ .09 $ .25 $ .29
========= ======== ======== ========
Diluted
As reported $ .11 $ .09 $ .28 $ .29
========= ======== ======== ========
Proforma $ .11 $ .09 $ .25 $ .29
========= ======== ======== ========
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.
10
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 Services,
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 September 30, 2003, the Bank had total deposits of
$314,966,344 and total loans of $268,745,254.
Our net income for the nine months ended September 30, 2003 was $1,965,180
compared with net income of $1,735,548 for the nine months ended September 30,
2002. Net income per share was $.29 compared with $.29 for the prior period.
Our net income for the quarter ended September 30, 2003 was $760,721
compared with $593,101 for the second quarter of 2003 and $539,346 for the
quarter ended September 30, 2002. The increase in net income is mainly
attributed to the decrease in our provision for loan losses. Net income per
share was $.11 compared with $.09 for the second quarter of 2003 and $.09 for
the quarter ended September 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 $7,429,652 for the first nine months
of 2002 to $9,335,409 for the first nine months of 2003. The increase was the
net result of higher average balances and a 60 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 4.49% for the first nine months of
2003 and 5.09% for the first nine months of 2002. Interest rates were lower
during the first nine 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 126 basis points and the average cost of funds
decreased 66 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 7.78% during the current period compared with 8.33% 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 third quarter of 2003 was 4.57% compared
with 5.09 % for the third quarter of 2002. The trend in interest rates during
the third quarter of 2003 was consistent with the decreases experienced during
the first half of 2003.
Provision for Loan Losses
The provision for loan losses for the first nine months of 2003 was
$364,000 compared with $476,000 for the same period of 2002. Loan charge-offs
for the first nine months of 2003 were $113,542 and recoveries were $17,166
resulting in an allowance for loan losses of $2,492,111 at September 30, 2003
(approximately .93% of total loans).
Our provision for loan losses for the third quarter of 2003 was $30,000
compared to $198,000 for the third quarter of 2002. Net loan charge-offs for the
third quarter of 2003 were $47,808. Based on our loan loss experience to date
and the low amount of problem loans, we have reduced our provision for loan
losses for the quarter ended September 30, 2003.
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. Prior to the current quarter, we used guidelines that
have been traditionally recommended by the bank regulatory agencies for
calculating the amount of the allowance for loan losses. At each balance sheet
date, we adjusted 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
borrower's ability to repay.
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.
We are in the process of developing a methodology to calculate the
allowance for loan losses which will reflect our loss experience and the
existing risks in 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.
13
Noninterest Income
Noninterest income increased from $1,035,226 in the first nine months of
2002 to $1,304,597 in the first nine 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
..55% for the first nine months of 2003 compared to .59% for the first nine
months of 2002.
Noninterest income increased from $369,490 in the third quarter of 2002 to
$491,591 for the third 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 .57 % for
the third quarter of 2003 compared with .60% for the third quarter of 2002.
Noninterest Expense
Noninterest expense increased from $5,759,441 in the first nine months of
2002 to $7,674,389 in the first nine 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 3.21% for the first nine months of 2003 compared to 3.30%
for the first nine months of 2002.
Noninterest expense increased from $2,124,370 in the third quarter of 2002
to $2,798,238 for the third quarter of 2003. Noninterest expense as a percentage
(annualized) of average assets was 3.27% for the third quarter of 2003 compared
with 3.42% for the third quarter of 2002.
Investment Securities
Total investment securities increased from $34,304,596 at December 31, 2002
to $40,830,166 at September 30, 2003. We had no Available For Sale securities at
September 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 nine months of 2003, Securities Held to Maturity with a face
value of $58,998,288 were replaced with similar short-term Securities Held to
Maturity.
Loans
Total loans have increased $46,350,000 during the first nine months of 2003
to $268,745,000 due to strong loan demand and customers at our new branches.
Approximately 68% of the loan portfolio is secured by real estate.
Loans receivable outstanding are summarized as follows:
Loan Portfolio
(In Thousands)
September 30, December 31,
2003 2002
Commercial, financial and agricultural $ 120,088 $ 93,746
Real estate - construction 6,747 5,615
Real estate mortgage - 1-4 family residential 95,263 80,264
Installment loans to individuals 46,647 42,770
--------- ---------
Loans Receivable $ 268,745 $ 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."
September 30, December 31,
2003 2002
Principal: (In Thousands)
Nonaccrual and past due loans:
Nonaccruing loans $ 154 $ 40
Loans past due 90 days or more
and still accruing 70 19
-------- --------
Total $ 224 $ 59
======== ========
Percent of total loans .08% 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 September
30, 2003.
Bank Premises
At September 30, 2003, we had thirteen full service branches, two
deposit-taking branches and two loan production offices.
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.
On September 18, 2003 we opened a full-service branch in Kingsport,
Tennessee. The Bank is a 3,600 square foot two story brick building situated on
a one-acre lot. It contains three drive-thru lanes and an ATM. The branch is
located at 2600 North John B. Dennis Highway, Kingsport, Tennessee 37660.
We have signed a three year lease, at $2,200/month, with Helms Candy Company
for a facility at 2975 Lee Highway, Bristol, Virginia to establish a branch.
Approval was granted by the SCC on October 6, 2003. The building, which measures
13'6" x 76'6" is a converted trailer which formerly housed a banking office.
After some renovations and remodeling, we hope to open for business before the
end of 2003.
Property has been purchased at 350 West Main Street in Abingdon, Virginia
for the construction of a full service branch. Purchase price of the property,
formerly housing a Radio Shack, which will require extensive remodeling, was
$500,000; plus another $210,000 for the adjacent property which will be
converted into parking areas. Cost of the remodeling and furnishing of the site
is anticipated to be approximately $500,000. Opening is projected for 2004.
Construction has begun behind the Main Office in Honaker for a new
Operations Building. The two story building will house Data Processing,
Operations, Accounting, and Bookkeeping. The cost of the land was $75,000; $1.5
million is the projection for the finished facility. Spring 2004 is the
anticipated completion date.
15
Bank Premises (Continued)
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 $51,160,893 during the first nine months of 2003 to
$314,966,344 at September 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 19.6% of total deposits at September 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.
Capital
Capital as a percentage of total assets was 9.16% at September 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 $55.9 million at September 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 September 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 180 at September 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 NINE MONTHS ENDED SEPTEMBER 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) $244,679 $ 14,143 7.78% $195,878 $ 12,233 8.33%
Federal Funds sold 19,810 151 1.02% 7,906 100 1.69%
Other investments 24,847 279 1.50% 3,319 141 5.66%
------- -------- ----- -------
Total Earning Assets 289,336 14,573 6.77% $207,103 12,474 8.03%
------- -------
Allowance for loans losses (2,411) (1,947)
Non-earning assets 31,401 27,308
------- -------
Total Assets $318,326 $232,464
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - Interest
bearing $ 19,106 $ 146 1.02% $ 12,877 $ 145 1.50%
Savings 26,318 279 1.42% 18,049 268 1.98%
All other time deposits 213,464 4,449 2.79% 160,893 4,155 3.44%
--------- ------- -------- -----
Total Deposits 258,888 4,874 2.52% 191,819 4,568 3.18%
------ -----
Non-interest bearing deposits 33,006 19,471
Other liabilities 1,404 1,254
------- -------
Total Liabilities 293,298 212,544
Stockholders' Equity 25,028 19,920
------- -------
Total Liabilities and
Stockholders' Equity $318,326 $232,464
======= =======
Net Interest Earnings $ 9,699 $ 7,906
======= =======
Net Yield on Interest
Earning Assets 4.49% 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 SEPTEMBER 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) $259,535 $4,961 7.89% $207,422 $ 4,286 8.27%
Federal Funds sold 30,814 71 .93% 9,978 42 1.68%
Other investments 21,457 70 1.31% 3,817 50 5.24%
------- ------- ------- -------
Total Earning Assets 311,806 5,102 6.73% 221,217 4,378 7.92%
------- -------
Allowance for loans losses (2,513) (2,061)
Non-earning assets 32,903 28,958
------- -------
Total Assets $342,196 $248,114
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - Interest bearing $ 23,873 $ 50 .85% $ 13,439 $ 52 1.55%
Savings 29,150 93 1.28% 19,617 98 2.00%
All other time deposits 225,391 1,467 2.64% 171,663 1,414 3.29%
------- ------- ---- ------- ----- ----
Total Deposits 278,414 1,610 2.34% 204,719 1,564 3.06%
-------- -------
Non-interest bearing deposits 35,354 21,755
Other liabilities 1,550 1,136
------- -------
Total Liabilities 315,318 227,610
Stockholders' Equity 26,878 20,504
------- -------
Total Liabilities and
Stockholders' Equity $342,196 $248,114
======= =======
Net Interest Earnings $ 3,492 $ 2,814
======= =======
Net Yield on Interest
Earning Assets 4.57% 5.09%
===== ====
(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)
September 30, 2003
1-90 91-365 Over 5
Uses of Funds Days Days 2005 2006 2007 2008 Years Total
- ------------- ---- ---- ---- ---- ---- ---- ----- -----
Loans $ 47,587 $98,231 $52,325 $32,154 $21,937 $7,555 $8,956 $268,745
Federal funds sold 5,526 5,526
Total investments 41,388 807 42,195
------ ------- ------ ------ ------ ----- ----- ------
Total 94,501 98,231 53,132 32,154 21,937 7,555 8,956 316,466
------ ------- ------ ------ ------ ----- ----- -------
Sources of Funds
Deposits
Demand and savings 56,641 56,641
Time deposits > $100M 53,337 77,027 14,772 10,527 7,813 1,821 14 165,311
Time deposits < $100M 19,856 27,486 7,263 4,518 1,925 518 61,566
------- ------ ----- ----- ----- ----- ----- ------
Total Deposits 129,834 104,513 22,035 15,045 9,738 2,339 14 283,518
------- ------- ------ -------- ----- ----- ----- -------
Discrete Gap (35,333) (6,282) 31,097 17,109 12,199 5,216 8,942 32,948
Cumulative Gap (35,333) (41,615) (10,518) 6,591 18,790 24,006 32,948
Ratio of Cumulative Gap -11.16% -13.15% -3.32% 2.08% 5.94% 7.59% 10.41%
To Total Earning Assets
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 September 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. Quantitative and Qualitative Disclosures About Market 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 September 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
September 30, December 31,
2003 2002
+300 4.36% (4.67)% (20.00)%
+200 2.61 (3.10) (15.00)
+100 1.30 (1.55) (7.00)
-100 -1.33 2.13 (7.00)
-200 -3.64 4.09 (15.00)
-300 -10.58 1.95 (20.00)
During the first nine 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 September 30, 2003, we had a cumulative Gap Rate Sensitivity Ratio (based
on contractual terms) of a negative 13.15% for the one year repricing period
compared with a negative 34.27% at December 31, 2002. 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.
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 - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote
of Security Holders - The annual meeting of New Peoples Bankshares,
Inc. was held on October 16, 2003 at which the
following directors were elected for terms of
three years each expiring at the 2006 annual
meeting of shareholders: Joe M. Carter, Harold
Lynn Keene, John D. Maxfield, Fred W. Meade and
E. Virgil Sampson, Jr.
Voted for 3,564,565
Voted against 4,400
Abstention 0
The terms of the following Directors continued
after the annual meeting.
Class II - Term Ending as of the 2004 Annual
Meeting
Tim Ball
Michael G. McGlothlin
Bill Ed Sample
Paul Vencill, Jr.
B. Scott White
Class III - Term Ending as of the 2005 Annual
Meeting
John D. Cox
Charles H. Gent
Frank Kilgore
Stephen H. Starnes
21
Item 5. Other Information - None
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)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
(filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
(filed herewith).
32.1 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.
None
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: November 12, 2003