UNITED STATES 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 March 31, 2004
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark whether the registrant 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:
6,905,569 shares of common stock, par value $2.00 per share,
outstanding as of May 1, 2004
1
NEW PEOPLES BANKSHARES, INC.
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements
Consolidated Statements of Income - Three Months
Ended March 31, 2004 and 2003 2
Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
Part I Financial Information
Item 1 Financial Statements
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
INTEREST AND DIVIDEND INCOME 2004 2003
---- ----
Loans including fees $ 5,431 $ 4,461
Federal funds sold 6 28
Investments 42 143
--------- ---------
Total Interest and Dividend Income 5,479 4,632
--------- ---------
INTEREST EXPENSE
Deposits
Demand 37 46
Savings 86 87
Time deposits 1,219 1,533
Other 3 -
--------- ---------
Total Interest Expense 1,345 1,666
--------- ---------
NET INTEREST INCOME 4,134 2,966
PROVISION FOR LOAN LOSSES 120 160
--------- ---------
Net Interest Income after
Provision for Loan Losses 4,014 2,806
--------- ---------
NONINTEREST INCOME
Service charges 259 183
Fees, commissions and other income 122 76
Loss on the sale of other real estate owned (3) -
Life insurance investment income 104 114
--------- ---------
Total Noninterest Income 482 373
--------- ---------
NONINTEREST EXPENSES
Salaries and employee benefits 2,077 1,349
Occupancy expense 418 314
Other operating expenses 826 605
--------- ---------
Total Noninterest Expenses 3,321 2,268
--------- ---------
INCOME BEFORE INCOME TAXES 1,175 911
INCOME TAX EXPENSE 402 300
--------- ---------
NET INCOME $ 773 $ 611
======== =========
Earnings Per Share
Basic $ .11 $ .09
======== ========
Fully Diluted $ .11 $ .09
======== =========
Average Weighted Shares of Common Stock
Basic 6,905,286 6,875,754
========= =========
Fully Diluted 7,002,366 6,937,309
========= =========
The accompanying notes are an integral part of this statement.
3
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
March 31, December 31,
2004 2003
(Unaudited)
Cash and due from banks $ 12,960 $ 8,746
Federal funds sold 460 3,327
-------- ---------
Total Cash and Cash Equivalents 13,420 12,073
Investment Securities
Available-for-sale 5,790 10,719
Loans receivable 324,029 295,438
Allowance for loan losses (2,501) (2,432)
--------- ---------
Net Loans 321,528 293,006
Bank premises and equipment, net 14,732 14,291
Equity securities (restricted) 1,790 1,365
Accrued interest receivable 1,816 1,896
Life insurance investments 8,451 8,359
Other assets 807 799
------- -------
Total Assets $ 368,334 $ 342,508
======== =========
LIABILITIES
Deposits:
Demand deposits:
Noninterest bearing $ 39,446 $ 33,296
Interest-bearing 26,950 19,802
Savings deposits 34,561 40,418
Time deposits 228,588 214,705
-------- ---------
Total Deposits 329,545 308,221
Federal Home Loan Bank advances 3,178 -
Accrued interest payable 504 496
Accrued expenses and other liabilities 1,501 986
-------- ---------
Total Liabilities 334,728 309,703
-------- ---------
STOCKHOLDERS' EQUITY
Common stock - $2.00 par value; 12,000,000
shares authorized; 6,905,569 and
6,903,003 shares issued and outstanding
for March 31, 2004 and December 31, 2003,
respectively 13,811 13,806
Additional paid-in-capital 13,091 13,076
Retained earnings 6,692 5,919
Accumulated other comprehensive income 12 4
--------- ---------
Total Stockholders' Equity 33,606 32,805
------- ---------
Total Liabilities and Stockholders' Equity $ 368,334 $ 342,508
======== =========
The accompanying notes are an integral part of this statement.
4
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
Retained Accumulated
Earnings/ Other
Shares of Additional Common (Accum- Compre- Total Compre-
Common Common Paid in Stock Sub- ulated hensive Shareholders' hensive
Stock Stock Capital scriptions Deficit) Income Equity Income
---------- --------- ---------- ----------- -------- --------- ----------- -------
Balance, December 31, 2002 6,008 $ 12,017 $ 5,948 $ 5,411 $ 3,105 $ - $ 26,481
Net Income 611 611 $ 611
Common Stock Issued 885 1,769 7,076 (5,411) 3,434
Cost of Common Stock Offering (3) (3)
Stock Options Exercised 5 10 28 38
--------- --------- --------- -------- ------ ------ -------- ----
Balance, March 31, 2003 6,898 $13,796 $13,049 $ - $ 3,716 $ - $ 30,561 $ 611
--------- -------- ------- -------- ------- ------ -------- ----
Balance, December 31, 2003 6,903 $13,806 $13,076 $ - $ 5,919 $ 4 $ 32,805
Net Income 773 773 $ 773
Unrealized gains (net of $4
thousand tax) on
available-for-sale securities 8 8 8
Stock Options Exercised 3 5 15 20
-------- -------- -------- -------- ------ ------ -------- ----
Balance, March 31, 2004 6,906 $13,811 $13,091 $ - $ 6,692 $ 12 $ 33,606 $ 781
======== ========= ======== ======== ====== ===== ======== ====
The accompanying notes are an integral part of this statement.
5
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 773 $ 611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 312 248
Provision for loan losses 120 160
Income (less expenses) on life insurance (92) (105)
Loss on sale of foreclosed real estate 3 -
Amortization of bond premiums 20 123
Net change in:
Interest receivable 80 175
Other assets (8) (71)
Accrued expense and other liabilities 523 332
------ ------
Net Cash Provided by Operating Activities 1,731 1,474
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (28,642) (11,818)
Purchase of securities held-to-maturity - (11,000)
Proceeds from sale of securities
available-for-sale 4,914 -
Proceeds from maturities of securities
held-to-maturity - 11,999
Purchase of Federal Reserve Bank stock (28) (66)
Purchase of Federal Home Loan Bank stock (397) (705)
Payments for the purchase of property (1,128) (1,261)
Proceeds from the sale of property 375 -
------- ------
Net Cash Used in Investing Activities (24,906) (12,851)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from common stock offering - 3,431
Common stock options exercised 20 38
Proceeds from Federal Home Loan Bank advances 3,178 -
Net change in:
Demand and savings deposits 7,441 9,599
Time deposits 13,883 (2,074)
------- -------
Net Cash Provided by Financing Activities 24,522 10,994
------- -------
Net increase (decrease) in cash and cash
equivalents 1,347 (383)
Cash and Cash Equivalents, Beginning of Period 12,073 14,939
-------- --------
Cash and Cash Equivalents, End of Period $ 13,420 $ 14,555
======== ========
Supplemental Disclosure of Cash Paid During
the Period for:
Interest $ 1,337 $ 1,764
The accompanying notes are an integral part of this statement
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS:
New Peoples Bankshares, Inc. ("the Company") is a bank holding company whose
principal activity is the ownership and management of a community bank. New
Peoples Bank, Inc. ("the Bank") was organized and incorporated under the laws of
the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations
on October 28, 1998, after receiving regulatory approval. As a state chartered
bank, the Bank is subject to regulations by the Virginia Bureau of Financial
Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve
Bank. The Bank provides general banking services to individuals, small and
medium size businesses and the professional community of southwestern Virginia,
southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company
formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web
Services, Inc.
NOTE 2 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 at March 31, 2004, and the results of operations for the three month
periods ended March 31, 2004 and 2003. The notes included herein should be
read in conjunction with the notes to financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
The results of operations for the three month periods ended March 31, 2004 and
2003 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 3 INVESTMENT SECURITIES:
The amortized cost and estimated fair value of securities at the dates indicated
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars are in Cost Gains Losses Value
thousands) --------- ---------- ---------- ----------
March 31, 2004
Available for Sale
U.S. Government
Agencies $ 5,672 $ 14 $ - $ 5,686
Municipal
Governments 101 3 - 104
------- ------ ------- ------
Total Securities AFS $ $ 17 $ - $ 5,790
5,773
======= ====== ======= ======
December 31, 2003
Available for Sale
U.S. Government
Agencies $ 10,612 $ 8 $ 6 $10,614
Municipal
Governments 101 4 - 105
------- ------ ----- ------
Total Securities AFS $ $ $ $10,719
10,713 12 6
======= ====== ====== ======
At March 31, 2004 and December 31, 2003, all securities were classified as
available for sale.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 INVESTMENT SECURITIES (Continued):
The amortized cost and fair value of investment securities at March 31, 2004, by
contractual maturity, are shown in the following schedule. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Weighted
(Dollars are in thousands) Amortized Fair Average
Securities Available for Cost Value Yield
Sale --------- --------- -----------
Due in one year or less $ 4,968 $ 4,971 1.23%
Due after one year through
five years 805 819 3.15%
------- ------- -------
Total $ 5,773 $ 5,790 1.37%
======= ======= =======
Investment securities with a carrying value of $3.3 million at March 31, 2004
and December 31, 2003 were pledged to secure public deposits and for other
purposes required by law.
During the first quarter of 2004, the Bank sold an available for sale security
and received total proceeds of $5.0 million.
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan
Bank, is required to hold stock in each. These equity securities are restricted
from trading and are recorded at a cost of $1.8 million and $1.4 million as of
March 31, 2004 and December 31, 2003, respectively.
NOTE 4 LOANS:
Loans receivable outstanding are summarized as follows:
March 31, December 31,
2004 2003
---- ----
(Dollars are in thousands)
Commercial, financial and agricultural $ 65,562 $ 58,593
Real estate - construction 7,978 7,258
Real estate - mortgages 205,292 185,191
Installment loans to individuals 45,197 44,396
------- -------
Total Loans $324,029 $295,438
======= =======
The following is a summary of information at March 31, 2004 and December 31,
2003 pertaining to nonperforming assets:
March 31, December 31,
(Dollars are in thousands) 2004 2003
---- ----
Principal:
Nonaccrual loans $ 278 $ 539
Loans past due 90 days or more still
accruing interest 9 26
------ ------
Total Loans $ 287 $ 565
======= ======
The following is a summary of information at March 31, 2004 and December 31,
2003 pertaining to impaired loans:
March 31, December 31,
(Dollars are in thousands) 2004 2003
---- ----
Impaired loans $ 382 $ 331
Valuation allowance $ 51 $ 95
Interest income not recognized $ 9 $ 2
Average investment in impaired loans $ 76 $ 49
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses are as follows:
For the Three Months Ended
March 31, March 31,
(Dollars are in thousands) 2004 2003
------- ------
Balance, beginning of year $ 2,432 $ 2,224
Provision for loan losses 120 160
Recoveries of loans charged off 6 6
Loans charged off (57) (48)
---------- --------
Balance, End of Year $ 2,501 $ 2,342
========= =========
Percentage of Loans 0.77% 1.00%
NOTE 6 RELATED PARTY LOANS:
During the year, officer and directors (and companies controlled by them) were
customers of and had loan transactions with the Bank in the normal course of
business which amounted to outstanding principal amounts of $8.5 million at
March 31, 2004 and $7.9 million at December 31, 2003. During the year ended
December 31, 2003, total principal additions were $12.5 million and principal
payments were $11.4 million. These transactions were made on substantially the
same terms as those prevailing for other customers and did not involve any
abnormal risk.
NOTE 7 COMMON STOCK:
On 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.
During the first quarter of 2004, 2,566 options to purchase shares of common
stock were exercised at $7.50 per share. At March 31, 2004, the following
exercisable options were outstanding.
Date of Grant Outstanding Exercise Price
December 12, 2001 237,900 $ 7.50
January 1, 2003 79,500 $ 10.00
January 1, 2004 86,000 $ 10.00
NOTE 8 EARNINGS PER SHARE:
Basic earnings per share computations are based on the weighted average number
of shares outstanding during each year. Dilutive earnings per share reflects the
additional common shares that would have been outstanding if dilutive potential
common shares had been issued. Potential common shares that may be issued relate
to outstanding options determined by the Treasury Method.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Caution About Forward Looking Statements
We make forward looking statements in this quarterly report that are subject to
risks and uncertainties. These forward looking statements include statements
regarding our profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, growth strategy, and financial and other goals. The
words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by factors including the following:
the ability to successfully manage our growth or implement our growth strategies
if we are unable to identify attractive markets, locations or opportunities to
expand in the future; maintaining capital levels adequate to support our growth;
maintaining cost controls and asset qualities as we open or acquire new
branches; reliance on our management team, including our ability to attract and
retain key personnel; the successful management of interest rate risk; changes
in general economic and business conditions in our market area; changes in
interest rates and interest rate policies; risks inherent in making loans such
as repayment risks and fluctuating collateral values; competition with other
banks and financial institutions, and companies outside of the banking industry,
including those companies that have substantially greater access to capital and
other resources; demand, development and acceptance of new products and
services; problems with technology utilized by us; changing trends in customer
profiles and behavior; and changes in banking and other laws and regulations
applicable to us.
Because of these uncertainties, our actual future results may be materially
different from the results indicated by these forward looking statements. In
addition, our past results of operations do not necessarily indicate our future
results.
Overview
For the first quarter of 2004, New Peoples Bankshares, Inc. ("the Company"),
which is the parent company of New Peoples Bank, Inc. (the Bank"),experienced
both strong earnings and loan and deposit growth. We are pleased to
announce net income for the first quarter 2004 of $773 thousand, or $.11 per
share. Total assets were $368.3 million, total loans were $324.0 million and
total deposits were $329.5 million. The Company is also continuing to expand in
southwestern Virginia.
Net income for the quarter ended March 31, 2004 was $773 thousand, as compared
to $611 thousand for the same period ended March 31, 2003. Net income per share
was $.11 for the quarter ended March 31, 2004, as compared to $.09 for the same
period in 2003. The increase is due primarily to the increased loan production
at the branches and the continued decrease in the cost of funds. We are pleased
to report a net interest margin for the first quarter of 2004 of 5.31% as
compared to 4.53% for the period ending March 31, 2003. The annualized return on
average equity was 9.35% and 10.28% for the quarters ended March 31, 2004 and
2003, respectively.
During the first quarter of 2004, strong growth was experienced in assets,
deposits and loans. At March 31, 2004, total assets were $368.3 million, an
increase of $25.8 million, or 7.54%, over December 31, 2003. Total deposits grew
$21.3 million, or 6.92%, to $329.5 million, and total loans were $324.0 million,
an increase of $28.6 million, or 9.68%, from the amounts at December 31, 2003.
During the first quarter of 2004, the Company continued expanding its branch
network by entering agreements to add offices in Richlands and Bristol,
Virginia. We have purchased a former bank building in Richlands, Virginia and
anticipate this new office to open as a full service branch in the second
quarter of 2004. Another former bank building in Bristol, Virginia near the
downtown area was purchased in the first quarter. This office, as well as the
Abingdon, Virginia office, are currently being renovated and are expected to
open in the summer of 2004. With these additions, the branch network will
consist of 19 full service offices and one loan production office located
throughout southwestern Virginia, southern West Virginia, and eastern Tennessee.
A new subsidiary, NPB Financial Services, Inc. began its operations in late
2003 and is making progress in the local market to which it sells insurance and
investment services to individuals, small businesses, and professionals.
Our focus remains on being a community bank that serves the financial needs of
our customers by developing personal, hometown relationships.
10
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and
estimates used in the preparation of our financial statements. The most critical
accounting policy relates to our provision for loan losses, which reflects the
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our borrowers were to deteriorate,
resulting in an impairment of their ability to make payments, our estimates
would be updated, and additional provisions could be required. For further
discussion of the estimates used in determining the allowance for loan losses,
we refer you to the section on "Provision for Loan Losses" in this discussion.
Net Interest Income and Net Interest Margin
Our main source of income is net interest income, or the difference between
interest income earned on earning assets and interest expenses on interest
bearing liabilities. Net interest margin best indicates how effective we
have been in deploying assets and liabilities and pricing strategies.
During the first quarter of 2004, we had a very strong net interest margin of
5.31%. This is compared to a net interest margin of 4.53% for the period ending
March 31, 2003. With recent additions to our lending staff, new markets served
and a recovering economy, we have witnessed strong loan growth. At the same
time, we have consistently decreased our cost of funds. As a result, our net
interest margin has significantly improved.
Net interest income, which is total interest and dividend income less total
interest expense, has continually increased from $3.0 million for the first
quarter of 2003 to $4.1 million for the same period in 2004. Loan income
increased to $5.5 million for the first quarter of 2004, or $970 thousand, from
$4.5 million for the same period in 2003. The increase is related to the
increase in loan volume during the year. In addition, despite a $21.3
million growth in deposits in the first quarter of 2004, or a 27.67% annual
increase in total interest bearing deposits, we were able to control the costs
on these funds. Total interest expense decreased $321 thousand to $1.3 million
for the first quarter of 2004 which is attributable to time deposits repricing
at a lower interest rate.
11
The following table shows the rates earned and paid on earning assets and
liabilities for the periods indicated.
Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates
(In Thousands of Dollars)
For the Quarter Ended For the Quarter Ended
March 31, 2004 March 31, 2003
--------------------------------------------- -----------------------------------
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
--------- -------- ------ --------- --------- -------
ASSETS
Loans including fees(1),(2),(3) $307,461 $5,431 7.30% $229,034 $4,461 8.14%
Federal Funds sold 2,549 6 0.95% 9,395 28 1.21%
Other investments 9,013 42 1.89% 31,415 143 1.86%
-------- ------- -------- --------
Total Earning Assets 319,023 5,479 7.09% 269,844 4,632 7.15%
-------- ------- --------- --------
Less: Allowance for loans
losses (2,464) (2,281)
Non-earning assets 35,698 29,872
--------- ---------
Total Assets $352,257 $297,435
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - Interest bearing $ 26,219 37 0.57% $ 16,053 46 1.17%
Savings 34,728 86 1.00% 23,332 87 1.52%
Time deposits 219,610 1,219 2.25% 203,777 1,533 3.09%
Other borrowings 871 3 1.39% - - -
--------- ------ ------- ------
Total interest bearing
liabilities 281,428 1,345 1.94% 243,162 1,666 2.81%
--------- ------ ------- ------
Non-interest bearing deposits 35,997 29,327
Other liabilities 1,763 1,174
---------- -------
Total Liabilities 319,188 273,663
Stockholders' Equity 33,069 23,772
---------- -------
Total Liabilities and
Stockholders' Equity $352,257 $297,435
========= =======
Net Interest Income $4,134 $2,966
===== ======
Net Yield on Interest Earning Assets 5.31% 4.53%
==== ====
Net Interest Spread 5.15% 4.34%
==== ====
(1) Non-accrual loans are not significant and have been included in the average
balance of loans outstanding.
(2) Loan fees are not material and have been included in interest income on
loans.
(3) Tax exempt income is not significant and has been treated as fully taxable.
12
Investment Securities
Total investment securities decreased from $10.7 million at December 31, 2003 to
$5.8 million at March 31, 2004. All of our securities are classified as
available for sale securities at March 31, 2004 and December 31, 2003. During
the first quarter 2004, we sold a $5.0 million security for loan funding
purposes.
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.
At March 31, 2004, $3.3 million in securities were pledged for public
deposits.
Loans
We have continued to have strong loan demand as evidenced by an increase in the
first quarter of 2004 of $28.6 million to $324.0 million from $295.4 million at
December 31, 2003. This increase results from new branches, additional loan
officers and an improved economy. A schedule of loans by type is included in the
notes to the financial statements. Approximately 65.82% of the loan portfolio at
the end of the first quarter of 2004 is secured by real estate.
Provision for Loan Losses
The provision for loan losses was $120 thousand for the first quarter of 2004
compared with $160 thousand for the same period in 2003. The allowance for loan
losses was $2.5 million at March 31, 2004 as compared to $2.4 million at
December 31, 2003. The ratio of the allowance for loan losses to total loans was
..79% at March 31, 2004 and .82% at the end of 2003. Net loans charged off for
the first quarter of 2004 remained low at $51 thousand, or .02% of average
loans, as compared to $42 thousand for first quarter of 2003, or .02% of average
loans.
The calculation of the allowance for loan losses is considered a critical
accounting policy. The adequacy of the allowance for loan losses is based upon
management's judgment and analysis. The following factors are evaluated in
determining the adequacy of the allowance: risk characteristics of the loan
portfolio, current and historical loss experience, concentrations and internal
and external factors such as general economic conditions.
Certain risk factors exist in the Bank's loan portfolio. Since the Bank began in
1998, we have experienced significant loan growth each year. Although we have
experienced lenders who are familiar with their customer base, some of the loans
are too new to have exhibited signs of weakness. In addition, recent expansions
into new markets increase credit risk. We consider these factors to be the
primary higher risk characteristics of the loan portfolio.
Loans delinquent greater than 90 days still accruing interest and loans in
non-accrual status present a higher risk factor. At March 31, 2004, there
were 6 loans in non-accrual status totaling $278 thousand, or 0.09% of total
loans. The amount of interest that would have been recognized on these loans in
the first quarter of 2004 was $7 thousand. There were 2 loans greater than 90
days past due and still accruing interest totaling $9 thousand. It is our policy
to stop accruing interest on a loan, and classify that loan as non-accrual under
the following circumstances: (a) whenever we are advised by the borrower that
scheduled principal payments or interest payments cannot be met, (b) when our
best judgment indicates that payment in full of principal and interest can no
longer be expected, or (c) when any such loan or obligation becomes delinquent
for 90 days unless it is both well secured and in the process of collection.
Non-accrual loans did not have a significant impact on interest income in any
of the periods presented. No loans are classified as troubled debt
restructurings as defined by Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings." There are also no
loans identified as "potential problem loans." We do not have any commitments
to lend additional funds to non-performing debtors.
Loss experience in the loan portfolio has been minimal. Net loans charged-off
over the five year period have not exceeded .08% of average loans in a
particular year. In addition, non-performing assets as a percentage of total
loans has not exceeded .34%. The trend has been consistent through the current
year. We view these as positive indicators of the quality of those loans
originated in the early years of the Bank.
A majority of the loans are collateralized by real estate located in our market
area. Market values have been and remain stable. It is our policy to
sufficiently collateralize loans to minimize loss exposures in case of default.
The market area is somewhat diverse, but in certain areas more reliant upon
agriculture and coal mining. As a result, increased risk of loan impairments is
possible if these industries experience a significant downturn. However, we do
not foresee this happening in the near future.
13
All internal and external factors are considered in the determination of the
adequacy of the allowance for loan losses. The methodology used to calculate the
allowance provides sufficiently for potential losses present at the end of the
period. The evaluation of individual loan credits is performed by the internal
credit review department. Loans are initially risk rated by the originating loan
officer. If deteriorations in the financial condition of the borrower and the
capacity to repay the debt occur, along with other factors, the loan may be
downgraded. This is typically determined by either the loan officer or credit
review personnel. Guidance for the evaluation is established by the regulatory
authorities who periodically review the results for compliance. The
classifications used by the Bank are superior, average, pass, other assets
especially mentioned, substandard, doubtful and loss.
Due to the risk factors previously mentioned, all loans classified as other
assets especially mentioned, substandard, doubtful and loss are individually
reviewed for impairment. An evaluation is made to determine if the collateral is
sufficient for each of these credits. If an exposure exists, a specific
allowance is directly made for the amount of the potential loss, which totaled
$51 thousand at March 31, 2004, or 2.04% of the allowance for loan loss, as
compared to $95 thousand on December 31, 2003, or 3.91% of the allowance for
loan loss. In addition, for these credits adequately secured by collateral, a
general allocation is made to allow for any inherent risks. During the first
quarter, certain loans, based on collateral, were pooled and risk rated
differently than the general allocation. As we continue to evaluate the loan
portfolio and the risk factors present, we will continue to designate pools as
deemed appropriate. We calculate an allowance for the remaining loan portfolio
based upon an estimated loan loss percentage. The evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available. As economic conditions and performance of
our loans change, it is possible that future increases may be needed to the
allowance for loan losses.
Deposits
We continued to have excellent growth in deposits which totaled $329.5 million
at March 31, 2004, an increase of $21.3 million, or 6.92%, from $308.2 million
at December 31, 2003. The increase in deposits is the result of new branches
opened in late 2003 and a special 6 month certificate of deposit promotion. The
largest areas of growth were in time deposits, which increased $13.9 million, or
6.47%, and demand deposits which increased $13.3 million, or 25.04%. Savings
deposits decreased $5.9 million, or 14.49%.
Time deposits of $100,000 or more equaled approximately 18.85% of deposits at
March 31, 2004 and 18.53% of deposits at December 31, 2003. We do not
have brokered deposits and internet accounts are limited to customers located in
the surrounding geographical area. The average balance of and the average rate
paid on deposits is shown in the net interest margin analysis.
Capital
Total capital at the end of the first quarter of 2004 was $33.6 million as
compared to $32.8 million at the end of December 31, 2003. The increase is
primarily the result of net income for the quarter. There were 2,566 stock
options exercised at $7.50 per share. Capital as a percentage of total assets
was 9.12% at March 31, 2004 as compared to 9.58% at December 31, 2003, both of
which exceeded regulatory requirements.
No dividends have been paid historically and none are anticipated in the
foreseeable future. The Company's strategic plan is to continue growing. To
accommodate this growth and have sufficient capital, earnings will need to be
retained.
Noninterest Income
Noninterest income increased to $482 thousand in the first quarter of 2004 from
$373 thousand in 2003. The $109 thousand, or 29.22%, increase is related to an
increase in overdraft fees on deposits accounts, insurance commissions and fee
income originated by NPB Financial Services, Inc. Noninterest income as a
percentage of average assets (annualized) increased from .50% for the three
months ended March 31, 2003 to .55% for the same period in 2004. We anticipate
this percentage to increase in 2004 as we increase noninterest income from our
new subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.
Noninterest Expense
Noninterest expense increased from $2.3 million for the three months ended March
31, 2003 to $3.3 million for the same period in 2004. The increase was largely
due to additional staffing and expenses associated with the new branches opened
and the general growth in operations as salaries and benefits increased from
$1.3 million to $2.1 million. We expect this number to increase for the
remainder of 2004 as we realize a full-year's effect of new staffing for the
new branches opened during 2003 and as we continue to add new branch locations.
Noninterest expense as a percentage of average assets (annualized) increased to
3.77% for the first quarter of 2004 as compared to 3.05% for the same period in
2003. Noninterest expense in the future will depend on our growth and the
number of new branch locations.
14
Greater efficiencies will result as we maximize the performance of our branches.
Our efficiency ratio, which is defined as noninterest expense divided by the sum
of net interest income plus noninterest income, was 71.92% for the first quarter
of 2004 as compared to 67.92% for the same period in 2003. This was slightly
higher as the result of additional staffing during the latter part of 2003 and
during the first quarter of 2004. The ratio of assets to full-time equivalent
employee was $1.8 million at the end of the first quarter of 2004 as compared to
$1.7 million at December 31, 2003.
Since we are still in the growth phase, these numbers will remain lower than
our peers until we reach a level of maturity, but should continue to improve.
Employees
As of March 31, 2004, we had 210 full time employees as compared to 194
full-time employees at December 31, 2003. None of our employees is covered by
any collective bargaining agreement, and relations with employees are considered
excellent.
Properties
At March 31, 2004, the Corporation's net investment in premises and equipment
was $14.7 million. Our main office is located at 2 Gent Drive in Honaker,
Virginia. The building contains a full service branch, administration, and
operations. Due to the expansive growth over the past five years there is not
adequate room to support all of the bank operations. A new operations center is
under construction at the Honaker location and is anticipated to be complete in
the third quarter of 2004.
We have purchased additional property during the first quarter of 2004 for
future expansion. One location is in Richlands, Virginia where we anticipate
opening a full service office in May 2004. Another location is near downtown
Bristol, Virginia. This location and the Abingdon, Virginia office are
being renovated and both are expected to open in the summer of 2004. Additional
expansion plans are underway.
The Bank has 5 operating lease arrangements with varying lengths terms. Of these
4, 3 are full service branches in Bristol, Davenport and Dungannon, Virginia.
The other two additional leased offices are located in Abingdon and Norton,
Virginia and are used for loan production and NPB Financial Services. All other
locations are owned.
We believe that all of our properties are maintained in good operating condition
and are suitable and adequate for our operational needs.
We will continue to investigate and consider other possible sites that would
enable us to profitably serve our chosen market area. Purchases of premises and
equipment for the year 2004 will depend on the decision to open additional
branches.
Liquidity
At March 31, 2004 and December 31, 2003, we had liquid assets in the
form of cash, due from banks and federal funds sold of approximately $13.4 and
$12.1 million, respectively. At March 31, 2004, all of our investments are
classified as available-for-sale providing an additional source of liquidity in
the amount of $2.5 million, which is net of those securities pledged as
collateral for public funds.
In the event we need additional funds, we have the ability to purchase federal
funds under established lines of credit totaling $20 million. We may also borrow
up to $49.4 million from the Federal Home Loan Bank which is secured by a
blanket lien on residential real estate loans. At March 31, 2004, we had
Federal Home Loan Bank overnight borrowings totaling $3.2 million. 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. In 2003
alone, we opened four new branches and plan to open three additional branches
during 2004. With the lines of credit available, the increasing deposit growth
in the newer branches and deposits anticipated at the new offices to be opened,
we believe we have adequate liquidity to meet our requirements and needs.
With recently increased loan demands, we have taken steps to retain and increase
deposits by offering premium rates on short-term deposits. We continue to offer
premium rates at our new branches to attract new customers and deposits.
Our loan to deposit ratio was 98.33% at March 31, 2004 and 95.85% at year end
2003. We are implementing strategies to increase deposits during the second
quarter of 2004 at both the new branches and existing branches. We can lower the
ratio as management deems appropriate by managing the rate of growth in our loan
portfolio. This can be done by changing interest rates charged or limiting the
amount of new loans approved.
15
Interest Sensitivity
At March 31, 2004, we had a negative cumulative gap rate sensitivity ratio of
40.81% for the one year re-pricing period, compared to 38.63% at December 31,
2003. This generally indicates that earnings would improve in a declining
interest rate environment as liabilities re-price more quickly than assets.
Conversely, earnings would probably decrease in periods during which interest
rates are increasing. On a quarterly basis, management reviews our interest rate
risk and has decided that the current position is an acceptable risk for a
growing community bank operating in a rural environment. The table set forth
below shows our interest sensitivity by period.
Interest Sensitivity Analysis
March 31, 2004
(In thousands of dollars)
1- 90 91-365 1-3 4-5 6-15 Over 15
Days Days Years Years Years years Total
------ ----- ----- ----- ------ ------ -------
Uses of funds:
Loans $57,031 $36,789 $40,575 $54,722 $88,149 $ 46,763 $324,029
Federal
funds sold 460 - - - - - 460
Investments 1,103 4,971 819 - - 687 7,580
Bank owned
life
insurance 8,451 - - - - - 8,451
------ ------ ------ ------ ------ ------- -------
Total
earning
assets $67,045 $41,760 $41,394 $54,722 $88,149 $ 47,450 $340,520
======= ======= ======= ======= ======= ======= =======
Sources of
funds:
Interest
bearing
DDA $26,950 $ - $ - $ - $ - $ - $ 26,950
Savings &
MMDA 34,561 - - - - - 34,561
Time deposits 66,662 116,436 36,317 9,173 - - 228,588
Other
borrowings 3,178 - - - - - 3,178
------ ------- ------- ------ ------- -------- --------
Total
interest
bearing
liabilities 131,351 116,436 36,317 9,173 - - 293,277
======== ======== ======== ====== ======== ======= ========
Discrete
Gap $(64,306) $(74,676) $ 5,077 $45,549 $88,149 $47,450 $ 47,243
========= ======== ======== ======== ======= ======= =======
Cumulative
Gap (64,306) (138,982) (133,905) (88,356) (207) 47,243
======== ======== ======== ======= ======= ======
Cumulative
Gap as % of
Total
Earning
Assets -18.88% -40.81% -39.32% -25.95% -0.06% 13.87%
Financial Instruments with Off Balance Sheet Risk and Credit Risk and
Contractual Obligations
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financial needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
16
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk at March 31, 2004 and December 31, 2003 is as follows:
March 31, December 31,
2004 2003
(In thousands)
Financial instruments who contract amounts
represent credit risk:
Commitments to extend credit $ 26,553 $ 22,080
Standby letters of credit 1,434 721
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible
future extensions of credit to existing customers. Those lines of credit may
not be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds certificates of deposit, deposit accounts, and real estate as
collateral supporting those commitments for which collateral is deemed
necessary.
The Bank has operating lease obligations for five locations which have not
materially changed since December 31, 2003. The leases have varying length
terms.
The Bank has contractual obligations for various building purchase, construction
and renovation projects totaling approximately $1.9 million at March 31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk represents the primary risk 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 parallel changes in interest rates of plus and minus certain basis
points as tied to the Wall Street Journal Prime interest rate. This is the more
conservative way to model interest rate risk. Management has control over
deposit expenses. In a rising rate environment, we may not increase deposit
interest rates as quickly as the assets reprice. Accordingly, results may be
more favorable than what is reflected in the table below.
17
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 March 31, 2004 and
December 31, 2003. At both dates, our interest rate risk is within the
established limitations.
The type of modeling used to generate the table does not take into account all
strategies that we might adopt in response to a sudden and sustained change in
interest rates. These strategies may include asset liability acquisitions of
appropriate maturities in the cash market and may also include off-balance sheet
alternatives to the extent such activity is authorized by the board of
directors.
Immediate Estimated Increase
Basis Point Change (Decrease) in Net Established
In Interest Rates Interest Income Limitation
March 31, December 31,
2004 2003
+300 (9.30)% (1.87)% (20.00)%
+200 (6.61) (1.24) (15.00)
+100 (3.93) (0.62) (7.00)
-100 4.49 0.60 (7.00)
-200 1.12 (3.39) (15.00)
-300 (5.01) (10.25) (20.00)
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the periodic filings with the Securities and Exchange Commission.
The Company's management is also responsible for establishing and maintaining
adequate internal control over financial reporting. There were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation of it that occurred during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect, internal
control over financial reporting.
18
Part II Other Information
Item 1. Legal Proceedings
In the course of operations, we may become a party to legal proceedings. We are
not aware of any material pending or threatened legal proceedings.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
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 Form 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
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification to the Securities and Exchange Commission by Chief
Executive Officer and Chief Financial Officer, as required by Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW PEOPLES BANKSHARES, INC.
By: /s/ KENNETH D. HART
-------------------------------------
Kenneth D. Hart
President and Chief Executive Officer
By: /s/ C. TODD ASBURY
-------------------------------------
C. Todd Asbury
Senior Vice President and Chief
Financial Officer
Date: May 14, 2004