Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2002
Commission File Number 000-33411
New Peoples Bankshares, Inc.
(Exact Name of Registrant as Specified in its Charter)
Virginia 31-1804543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
2 Gent Drive 24260
Honaker, VA (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number including area code) (276) 873-6288
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $2 Par Value
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 subhject to
such filing requirements for past 90 days. Yes ..X. No ....
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes .... No ..X..
The aggregate market value of the voting stock held by non-affiliates, based
on the last reported sales prices of $10.00 per share during the first quarter
of 2003, was $62,740,040.
The number of shares outstanding of the registrant's common stock, was
6,903,862 as of March 15, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
None
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained herein on page 62.
2
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Selected Historical Financial Information 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A. Market and Interest Rate Risk Management 31
Item 8. Financial Statements 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 55
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management 58
Item 13. Certain Relationships and Related Transactions 60
Item 14. Controls and Procedures 61
PART IV
Item 15. Exhibits and Reports on Form 8-K 62
SIGNATURES 63
- 2 -
3
PART I
Item 1. Description of Business
General
New Peoples Bankshares, Inc. is the bank holding company for New Peoples Bank,
Inc., a Virginia banking corporation headquartered in Honaker, Virginia. We are
engaged in the commercial banking business, primarily serving Russell, Scott,
Buchanan, Dickenson, Washington and Wise Counties in southwest Virginia and
Mercer County in West Virginia. In addition, the close proximity and mobile
nature of individuals and businesses in adjoining counties in Virginia and West
Virginia and nearby cities places these markets within our bank's targeted trade
area. We also serve individuals and businesses from other areas, including
northeastern Tennessee and eastern West Virginia.
We offer a range of banking and related financial services focused primarily
towards serving individuals, small to medium size businesses, and the
professional community. We strive to serve the banking needs of our customers
while developing personal, hometown relationships with them. Our board of
directors believes that marketing customized banking services will enable us to
establish a niche in the financial services marketplace in our market.
We provide professionals and small and medium size businesses in our market area
with responsive and technologically advanced banking services. These services
include loans that are priced on a deposit relationship basis, easy access to
our decision makers, and quick and innovative action necessary to meet a
customer's banking needs. Our capitalization and lending limit enables us to
satisfy the credit needs of a large portion of the targeted market segment. When
a customer needs a loan that exceeds our lending limit, we try to find other
financial institutions to participate in the loan with us.
Our History
The bank was incorporated under the laws of the Commonwealth of Virginia on
December 9, 1997 and began operations on October 28, 1998. On September 27,
2001, the shareholders of the bank approved a plan of reorganization under which
they exchanged their shares of bank common stock for shares of our common stock.
On November 30, 2001, the reorganization was completed and the bank became our
wholly owned subsidiary. The bank is our only subsidiary.
The formation of the bank was first discussed by a group of citizens who
responded to their community's yearning for the friendly hometown banking
provided for years by Peoples Bank, which also originated in Russell County.
Peoples Bank served their community as an independent community bank from its
formation in 1970 until 1987 and as part of the Premier Bank family from its
acquisition by Premier Bankshares Corporation in 1987 until 1997. First Virginia
Banks, Inc. acquired Premier and all of its banking subsidiaries in 1997.
Although Peoples Bank and New Peoples Bank have no formal or legal connection,
several of the officers, board members and employees who made Peoples Bank a
success formed the nucleus for New Peoples Bank.
This core Russell County group invited residents of Scott County, Buchanan
County and Dickenson County to promote the idea of organizing southwest
Virginia's first community bank in almost two decades. The community
response was overwhelming and over 2,400 shareholders emerged to raise in excess
of $11 million dollars in start-up capital within a 90-day sale period. The
Commonwealth of Virginia authorized the bank to open three banks at once,
including the central headquarters in Honaker, Virginia, and branches in Weber
City and Castlewood, Virginia. Loan production offices were opened in Norton,
Clintwood and Claypool Hill, Virginia.
4
Location and Market Area
We initially opened with full service branches in Honaker and Weber City,
Virginia and in 1999 opened a full service branch in Castlewood, Virginia.
During 2000, we opened full service branches in Haysi and Lebanon, Virginia.
During 2001, we opened branches in Pounding Mill, Virginia and Princeton, West
Virginia. In 2002, we have opened branch offices in Gate City, Clintwood, Big
Stone Gap, Tazwell and Davenport, Virginia. We also have loan production offices
located in Norton and Abingdon, Virginia. Management will continue to
investigate and consider other possible sites that would enable us to profitably
serve our chosen market area.
In order to open any additional banking offices, we must obtain prior regulatory
approval, which takes into account a number of factors, including, among others,
a determination that we have capital in an amount deemed necessary to warrant
additional expansion and a finding that the public interest will be served.
While we plan to seek regulatory approval at the appropriate time to establish
additional banking offices, there can be no assurance when or if we will be able
to undertake such expansion plans.
Internet Site
In March 2001, we opened our internet banking site at
www.newpeoplesbank.com. The site includes a customer service area that
contains branch and ATM locations, product descriptions and current
interest rates offered on deposit accounts. Customers with internet access can
access account balances, make transfers between accounts, enter stop payment
orders, order checks, and use an optional bill paying service. New customers who
live within a limited market area can open accounts on line.
Banking Services
General. We accept deposits, makes consumer and commercial loans, issues drafts,
and provide other services customarily offered by a commercial bank, such as
business and personal checking and savings accounts, walk-up tellers, drive-in
windows, and 24-hour automated teller machines. New Peoples Bank is a member of
the Federal Reserve System and its deposits are insured under the Federal
Deposit Insurance Act to the limits provider thereunder.
We offer a full range of short-to-medium term commercial and personal loans.
Commercial loans include both secured and unsecured loans for working capital
(including inventory and receivables), business expansion (including
acquisition of real estate and improvements) and purchase of equipment and
machinery. Consumer loans may include secured and unsecured loans for financing
automobiles, home improvements, education and personal investments.
Our lending activities are subject to a variety of lending limits imposed by
state law. While differing limits apply in certain circumstances based on the
type of loan or the nature of the borrower (including the borrower's
relationship to the bank), in general New Peoples Bank is subject to a
loan-to-one borrower limit of an amount equal to 15% of its capital and surplus
in the case of loans which are not fully secured by readily marketable or other
permissible types of collateral. The bank voluntarily may choose to impose a
policy limit on loans to a single borrower that is less than the legal lending
limit.
We obtain short-to medium term commercial and personal loans through direct
solicitation of owners and continued business from customers. Completed
commercial loan applications are reviewed by our loan officers. As part of the
application process, information is obtained concerning the income, financial
condition, employment and credit history of the applicant. If commercial real
estate is involved, information is also obtained concerning cash flow after debt
service. Loan quality is analyzed based on the bank's experience and its credit
underwriting guidelines.
5
Loans by type as a percentage of total loans are as follows:
December 31,
2002 2001 2000 1999 1998
----------------------------------------------
Commercial, financial
and agriculture 19.32% 19.62% 22.84% 26.94% 46.70%
Real estate
- construction 2.52% 2.15% 1.17% 2.64% 1.45%
Real estate
- mortgage 58.93% 54.81% 54.05% 47.70% 31.76%
Installment loans
to individuals 19.23% 23.42% 21.94% 22.72% 20.09%
------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
Commercial Loans. We make commercial loans to qualified businesses in our market
area. Our commercial lending consists primarily of commercial and industrial
loans to finance accounts receivable, inventory, property, plant and equipment.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but have commensurately higher yields. Residential
mortgage loans generally are made on the basis of the borrower's ability to make
repayment from his employment and other income and are secured by real estate
whose value tends to be easily ascertainable. In contrast, commercial business
loans typically are made on the basis of the borrower's ability to make
repayment from cash flow from its business and are secured by business assets,
such as commercial real estate, accounts receivable, equipment and
inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself.
Further, the collateral for commercial business loans may depreciate over time
and cannot be appraised with as much precision as residential real estate. To
manage these risks, our underwriting guidelines require us to secure commercial
loans with both the assets of the borrowing business and other additional
collateral and guarantees that may be available. In addition, we actively
monitor certain measures of the borrower, including advance rate, cash flow,
collateral value and other appropriate credit factors.
Residential Mortgage Loans. Our residential mortgage loans consist of
residential first and second mortgage loans, residential construction loans and
home equity lines of credit and term loans secured by first and second mortgages
on the residences of borrowers for home improvements, education and other
personal expenditures. We make mortgage loans with a variety of terms, including
fixed and floating or variable rates and a variety of maturities. Maturities for
construction loans generally range from 4-12 to months for residential property
and from 6 to 18 months for non-residential and multi-family properties.
Under our underwriting guidelines, residential mortgage loans generally are made
on the basis of the borrower's ability to make repayment from his employment and
other income and are secured by real estate whose value tends to be easily
ascertainable. These loans are made consistent with the appraisal policies and
real estate lending policies, which detail maximum loan-to-value ratios and
maturities. Loans for owner-occupied property are generally made with a
loan-to-value ratio of up to 80% for first liens. Higher loan-to-value ratios
are allowed based on the borrower's unusually strong general liquidity, net
worth and cash flow. Loan-to-value ratios for home equity lines of credit
generally do not exceed 90%. If the loan-to-value ratio exceeds 80% for
residential mortgage loans, the bank obtains appropriate credit enhancement in
the form of either mortgage insurance or readily marketable collateral.
6
Construction Loans. Construction lending entails significant additional
risks, compared to residential mortgage lending. Construction loans often
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Construction loans also involve additional risks
attributable to the fact that loan funds are advanced upon the security of
property under construction, which is of uncertain value prior to the completion
of construction. Thus, it is more difficult to evaluate accurately
the total loan funds required to complete a project and related loan-to-value
ratios. To minimize the risks associated with construction lending, our
underwriting guidelines limit loan-to-value ratios for residential
property to 85% and for non-residential property and multi-family properties to
80%, in addition to its usual credit analysis of its borrowers. Management
feels that the loan-to-value ratios described above are sufficient to compensate
for fluctuations in the real estate market to minimize the risk of loss.
Consumer Loans. Our consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes. The specific types of
consumer loans that we make include home improvement loans, debt
consolidation loans and general consumer lending. Consumer loans entail greater
risk than residential mortgage loans do, particularly in the case of consumer
loans that are unsecured, such as lines of credit, or secured by rapidly
depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loan such as the bank, and a borrower may be able to assert
against such assignee claims and defenses that it has against the seller of the
underlying collateral.
Our underwriting policy for consumer loans is to accept moderate risk while
minimizing losses, primarily through a careful analysis of the borrower. In
evaluating consumer loans, we require our lending officers to review the
borrower's level and stability of income, past credit history and the impact of
these factors on the ability of the borrower to repay the loan in a timely
manner. In addition, we maintain an appropriate margin between the loan amount
and collateral value.
Other Bank Services. Other bank services include safe deposit boxes,
cashier's checks, certain cash management services, traveler's checks, direct
deposit of payroll and social security checks and automatic drafts for various
accounts. We offer ATM card services that can be used by our customers
throughout Virginia and other regions. We also offer MasterCard and VISA credit
card services through an intermediary.
We do not anticipate exercising trust powers in the next few years. We may
establish a trust department in the future but cannot do so without the prior
approval of the Virginia State Corporation Commission's Bureau of Financial
Institutions. In the interim, we may contract for trust services to our
customers through outside vendors.
7
The following table discloses selected financial information related to our
operations during the last three years.
Table 1
Selected Financial Data
(Dollars in thousands)
As of / For the Year Ended
December 31,
2002 2001 2000
Total assets $291,398 $214,253 $157,391
Securities 34,305 5,658 11,873
Loans, net of allowance
for loan losses 220,170 177,423 129,775
Deposits 263,805 194,011 138,447
Shareholder's equity 26,481 18,891 17,882
Net interest income 10,665 7,317 4,903
Provision for loan losses 603 571 513
Noninterest income 1,412 753 444
Noninterest expense 8,218 5,933 3,683
Net income 2,178 1,009 761
Competition
The banking business is highly competitive. We compete as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market mutual funds and other financial
institutions operating in the Southwest Virginia market area and elsewhere. Our
market area is a highly competitive, highly branched banking market.
Competition in the market area for loans to small businesses and
professionals, the bank's target market, is intense, and pricing is
important. Most of our competitors have substantially greater resources and
lending limits than we have. They offer certain services, such as extensive and
established branch networks and trust services, that we do not expect to provide
or will not provide in the near future. Moreover, larger institutions operating
in the Southwestern Virginia market area have access to borrowed funds at lower
cost than are available to us. Deposit competition among institutions in the
market area also is strong. As a result, it is possible that we may pay
above-market rates to attract deposits. We generally pay above-market rates,
usually one percent above current rates for a six-month period, to attract
deposits when we open a new branch office.
While pricing is important, our principal method of competition is service. As a
community banking organization, we strive to serve the banking needs of our
customers while developing personal, hometown relationships with them. As a
result, we provide a significant amount of service and a range of products
without the fees that customers can expect from larger banking institutions.
According to a market share report prepared by the FDIC, as of June 30, 2002,
the most recent date for which market share information is available, New
Peoples Bank's deposits as a percentage of total deposits in its major areas
were as follows: Russell County, VA - 31.84%, Scott County, VA - 24.91%,
Dickenson County, VA - 16.99%, Tazewell County, VA - 1.79% and Mercer County,
WV - 2.30%.
8
Employees
As of December 31, 2002, we had 150 total employees, 145 of which were full-time
employees. None of our employees is covered by any collective bargaining
agreement, and relations with employees are considered excellent.
Supervision and Regulation
General. As a bank holding company, we are subject to regulation under the Bank
Holding Company Act of 1956, as amended, the ("BHCA") and the examination
and reporting requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Under the BHCA, a bank holding company may
not directly or indirectly acquire ownership or control of more than 5% of the
voting shares or substantially all of the assets of any bank or merge or
consolidate with another bank holding company without the prior approval of the
Federal Reserve Board. The BHCA also generally limits the activities of a bank
holding company to that of banking, managing or controlling banks, or any other
activity that is determined to be so closely related to banking or to managing
or controlling banks that an exception is allowed for those activities.
As a state-chartered commercial bank, we are subject to regulation,
supervision and examination by the Commission. We are also subject to
regulation, supervision and examination by the Federal Reserve Board. State and
federal law also governs the activities in which we engage, the investments that
we make and the aggregate amount of loans that may be granted to one borrower.
Various consumer and compliance laws and regulations also affect
our operations.
The earnings of our subsidiary, and therefore our earnings, are affected by
general economic conditions, management policies, changes in state and federal
legislation and actions of various regulatory authorities, including those
referred to above. The following description summarizes the
significant federal and state laws to which we are subject. To the extent
statutory or regulatory provisions or proposals are described,
the description is qualified in its entirety by reference to the particular
statutory or regulatory provisions or proposals.
Payment of Dividends. The Company is a legal entity separate and distinct from
its banking subsidiary. The majority of our revenues are from dividends paid to
us by the Bank. The Bank is subject to laws and regulations that limit the
amount of dividends it can pay. In addition, both we and the Bank are subject to
various regulatory restrictions relating to the payment of dividends, including
requirements to maintain capital at or above regulatory minimums. Banking
regulators have indicated that banking organizations should generally pay
dividends only if the organization's net income available to common
shareholders over the past year has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition. We
do not expect that any of these laws, regulations or policies will materially
affect the ability of the Bank to pay dividends. During the year ended December
31, 2001, the Bank declared $25,000 in dividends payable to the Company. No
dividends were declared during 2002.
Capital. The Federal Reserve Board has issued risk-based and leverage capital
guidelines applicable to banking organizations that it supervises. Under the
risk-based capital requirements, we and the Bank are each generally required to
maintain a minimum ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) of 8%.
At least half of the total capital must be composed of common equity, retained
earnings and qualifying perpetual preferred stock, less certain intangibles
("Tier 1 capital"). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments, qualifying preferred stock and a limited
amount of the loan loss allowance ("Tier 2 capital," which, together with Tier 1
capital, composes "total capital").
9
In addition, each of the federal banking regulatory agencies has established
minimum leverage capital requirements for banking organizations. Pursuant to
these requirements, banking organizations must maintain a minimum ratio of Tier
1 capital to adjusted average quarterly assets equal to 3% to 5% subject to
federal banking regulatory evaluation of an organization's overall safety and
soundness.
The risk-based capital or standards of the Federal Reserve Board explicitly
identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a banking organization's capital adequacy.
Other Safety and Soundness Regulations. There are a number of obligations and
restrictions imposed on bank holding companies and their depository institution
subsidiaries by federal law and regulatory policy that are designed to reduce
potential loss exposure to the depositors of such depository institutions and to
the Federal Deposit Insurance Corporation ("FDIC") insurance funds in the event
that the depository institution is insolvent or is in danger of becoming
insolvent. For example, under requirements of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so otherwise. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the insolvency of commonly
controlled insured depository institutions or for any assistance provided by the
FDIC to commonly controlled insured depository institutions in danger of
failure. The FDIC may decline to enforce the cross-guarantee provision if it
determines that a waiver is in the best interests of the deposit insurance
funds. The FDIC's claim for reimbursement under the cross guarantee provisions
is superior to claims of shareholders of the insured depository institution or
its holding company but is subordinate to claims of depositors, secured
creditors and nonaffiliated holders of subordinated debt of the commonly
controlled insured depository institutions.
The federal banking agencies also have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the
institution in question is well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically
undercapitalized, as defined by the law. As of December 31, 2002, we and the
Bank were well capitalized.
State banking regulators also have broad enforcement powers over the Bank,
including the power to impose fines and other civil and criminal penalties, and
to appoint a conservator.
Interstate Banking and Branching. Current federal law authorizes interstate
acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state was
authorized to merge with a bank headquartered in another state, as long as
neither of the states had opted out of such interstate merger authority prior to
such date. After a bank has established branches in a state through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where a bank headquartered in that state
could have established or acquired branches under applicable federal or state
law.
10
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the "Act")
was signed into law on November 12, 1999. The Act covers a broad range of
issues, including a repeal of most of the restrictions on affiliations among
depository institutions, securities firms and insurance companies. Most of the
Act's provisions require the federal banking regulatory agencies and other
regulatory bodies to adopt regulations to implement the Act, and for that reason
an assessment of the full impact on us must await completion of that regulatory
process.
The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus permitting
unrestricted affiliations between banks and securities firms. The Act also
permits bank holding companies to elect to become financial holding
companies. A financial holding company may engage in or acquire companies that
engage in a broad range of financial services, including securities activities
such as underwriting, dealing, brokerage, investment and merchant banking; and
insurance underwriting, sales and brokerage activities. In order to become a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating.
The Act provides that the states continue to have the authority to regulate
insurance activities, but prohibits the states in most instances from preventing
or significantly interfering with the ability of a bank, directly or through an
affiliate, to engage in insurance sales, solicitations or cross-marketing
activities. Although the states generally must regulate bank insurance
activities in a nondiscriminatory manner, the states may continue to adopt and
enforce rules that specifically regulate bank insurance activities in
certain areas identified in the Act. The Act directs the federal banking
regulatory agencies to adopt insurance consumer protection regulations that
apply to sales practices, solicitations, advertising and disclosures.
The Act adopts a system of functional regulation under which the Federal Reserve
Board is confirmed as the umbrella regulator for financial holding companies,
but financial holding company affiliates are to be principally regulated by
functional regulators such as the FDIC for state nonmember bank affiliates, the
Securities and Exchange Commission for securities affiliates and state insurance
regulators for insurance affiliates. The Act repeals the broad exemption of
banks from the definitions of "broker" and "dealer" for purposes of the
Securities Exchange Act of 1934, as amended, but identifies a set of specific
activities, including traditional bank trust and fiduciary activities, in which
a bank may engage without being deemed a "broker", and a set of activities in
which a bank may engage without being deemed a "dealer". The Act also makes
conforming changes in the definitions of "broker" and "dealer" for purposes of
the Investment Company Act of 1940, as amended, and the Investment Advisers Act
of 1940, as amended.
The Act contains extensive customer privacy protection provisions. Under these
provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The Act also provides that the states may adopt customer privacy
protections that are more strict than those contained in the Act. The Act also
makes a criminal offense, except in limited circumstances, obtaining or
attempting to obtain customer information of a financial nature by fraudulent or
deceptive means.
11
International Money Laundering Abatement and Financial Anti-Terrorism Act of
2001. On October 26, 2001, the USA Patriot Act of 2001 was signed into law. This
act contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains anti-money
laundering measures affecting insured depository institutions, broker-dealers
and certain other financial institutions. The IMLAFA requires U.S. financial
institutions to adopt new policies and procedures to fight money laundering and
grant the Secretary of the Treasury broad authority to establish regulations and
to impose requirements and restrictions on financial institutions'
operations. We do not expect that compliance with the IMLAFA will have a
material impact on our or the Bank's results of operations or financial
condition.
Sarbanes -Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act") was signed into law. The Sarbanes-Oxley Act
represents a comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. The Sarbanes-Oxley Act is
applicable to all companies with equity or debt securities registered under the
Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act
establishes: (1) new requirements for audit committees,
including independence, expertise and responsibilities; (2) additional
responsibilities regarding financial statements for the Chief Executive Officer
and Chief Financial Officer of the reporting company; (3) new standards for
auditors and regulation of audits; (4) increased disclosure and reporting
obligations for the reporting company and their directors and executive
officers; and (5) new increased civil and criminal penalties for violation of
the securities laws. Many of the provisions became effective immediately while
other provisions became effective over a period of 30 to 270 days and are
subject to rulemaking by the Securities and Exchange Commission. We anticipate
that we will incur additional expenses to comply with the provisions of the
Sarbanes-Oxley Act and the resulting regulations. However, we do not expect that
the added expenses for such compliance will have a material impact on our or the
Bank's results of operations or financial condition.
12
Effect of Governmental Monetary Policies
Our operations are affected not only by general economic conditions, but also by
the policies of various regulatory authorities. In particular, the Federal
Reserve Board regulates money and credit conditions and interest rates in order
to influence general economic conditions. These policies have a significant
influence on overall growth and distribution of bank loans, investments and
deposits, and affect interest rates charged on loans or paid for time and
savings deposits. Federal Reserve Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and are expected
to do so in the future.
Item 2. Description of Property
At December 31, 2002, the Bank's net investment in Bank premises and equipment
in service was $10,915,165. A schedule by type is shown in Note 7 to the
financial statements. A description of the Bank's property is as follows.
Our main office in Honaker, Virginia, which we own, contains 11,800 square feet
on three floors and is situated on 2.5 acres. The building contains a full
service branch, administration operations, bookkeeping and credit
departments, two drive-thru lanes and an ATM. The office is an attractive brick
building with adequate room for current operations. The office is located at 2
Gent Drive, Honaker, Virginia 24260.
The Branch at Weber City, which we own, is a 2,700 square foot brick building
situated on a 200 x 150 lot. It contains a full service branch with three
drive-thru lanes and an ATM. The branch is located at 131 U.S. Highway 23 South,
Weber City, Virginia 24290.
The Branch at Castlewood, which we own, is a 4,500 square foot brick building
situated on a 300 x 150 lot. It contains a full service branch with two
drive-thru lanes and an ATM. The branch is located at 102 Miners Drive,
Castlewood, Virginia 24224.
The Branch at Haysi, which we own, is a 2,400 square foot brick building
situated on a one-fourth acre lot. It contains a full service branch with
drive-thru lanes and an ATM. The branch is located at 402 Main Street, Haysi,
Virginia 24256.
The Branch at Lebanon, which we own, is a 6,000 square foot building, of brick
construction, situated on a one acre lot. It contains a full service branch with
drive-thru lanes and an ATM. The branch is located at 685 North East Main
Street, Lebanon, Virginia 24266.
The Branch at Pounding Mill, which we own, is a 3,600 square foot brick building
situated on a one acre lot. It contains a full service branch with two
drive-thru lanes and an ATM. The branch is located on Route 460 at Pounding
Mill, Virginia 24637.
The Branch at Princeton, which we own, is a 3,600 square foot brick building
situated on a .39 acre lot. It contains a full service branch with two
drive-thru lanes and an ATM. The branch is located at 1221 Stafford Drive,
Princeton, West Virginia 24740.
On January 3, 2002, we opened a branch in Gate City, Virginia, which we own. The
branch is a 3,600 square foot brick building situated on a one acre lot. It
contains a full service branch with two drive-thru lanes and an ATM. The branch
is located at 326 East Jackson Street, Gate City, Virginia 24251.
On May 16, 2002, we opened a branch in Clintwood, Virginia, which we own and
which replaces the loan production office. The Bank is a 3,600 square foot brick
building situated on a one acre lot. It contains a full service branch with
drive thru lanes and an ATM. The branch is located on Route 83, Colley Shopping
Center, Clintwood, Virginia 24228.
13
On August 8, 2002, we opened a branch in Big Stone Gap, Virginia, which we own.
The Bank is a 2,800 square foot brick building situated on a half-acre lot. It
contains a full service branch with drive thru lanes and ATM. The branch is
located at 419 Shawnee Avenue East, Big Stone Gap, Virginia 24219.
On September 26, 2002, we opened a branch in Tazewell, Virginia, which we own.
The Bank is a 1,900 square foot bricked building situated on a 0.4 acre lot. It
contains a full service branch with drive thru lanes and an ATM. The branch is
located at 157 Tazewell Mall Circle, Tazewell, Virginia 24630.
On December 5, 2002, we opened a semi-branch at Davenport, from leased
facilities, primarily as a deposit-taking service to the community. The building
is an original mobile unit, converted to a stationary structure, with partial
wood siding and partial brick exterior. It contains one drive thru lane and no
ATM. The location is at the intersection of State Routes 80 and 600, Davenport,
VA 24239.
The loan production offices located in Norton and Abingdon are leased through
operating lease arrangements with varying term lengths.
We believe that all of our properties are maintained in good operating condition
and are suitable and adequate for our operational needs.
Land was purchased and construction is nearing completion for a full service
branch in Grundy, Virginia. Approval was granted by the State Corporation
Commission on March 3, 2003 for the new branch, which we own. The building is a
3,400 square foot building, situated on one acre of land. It contains a full
service branch with drive thru lanes and an ATM. The branch is located on U.S.
Route 460, RR4, Box 49, Grundy, Virginia 24614. The scheduled opening date is
April 2003.
Land has been purchased and preliminary construction has begun for a full
service branch in Bloomingdale, Tennessee. It is anticipated
that construction will be completed by late autumn 2003, at costs similar to
those for the Gate City and Clintwood branches.
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 2003 will depend on the decision to open additional
branches.
Item 3. Legal Proceedings
In the course of our operations, we may become a party to legal proceedings. We
are not aware of any material pending or threatened legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
We have not submitted any matters to the vote of security holders for the
quarter ending December 31, 2002.
14
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
(a) Market Information
We act as our own transfer agent. At present, there is no public trading
market for our common stock. Trades in our common stock occur sporadically
on a local basis.
The high and low trade prices of the Company's common stock known to us are
set forth in the table below. Trade prices have been restated to show the
effects of the 2 for 1 stock split on January 1, 2002. Other transactions
may have occurred at prices about which we are not aware.
2002 2001
--------------- ---------------
High Low High Low
1st quarter $ 10.00 $10.00 $ 4.50 $ 3.75
2nd quarter 10.00 10.00 4.50 3.75
3rd quarter 11.00 11.00 4.88 3.75
4th quarter 10.00 10.00 4.88 3.75
The most recent sales price of which management is aware was $7.00 per
share during the first quarter of 2003.
(b) On March 1, 2003, there were approximately 5,630 shareholders of record.
(c) Dividends
We have not declared a dividend. The declaration of dividends in the future
will depend on our earnings and capital requirements. We are subject to
certain restrictions imposed by the reserve and capital requirements of
federal and Virginia banking statutes and regulations. Additionally, we
intend to follow a policy of retaining earnings, if any, for the purpose of
increasing net worth and reserves during our initial years of operation in
order to promote our growth and ability to compete in our market area. As a
result, we do not anticipate paying a dividend on our Common Stock in 2003.
See Note 15 and Note 18 for further discussion of dividend limitations and
capital requirements.
(d) Stock Offering
On October 15, 2002, upon approval from the Securities and Exchange
Commission, 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, which
resulted in total offering proceeds of $8,904,690. Expenses relating to the
offering totaled $76,635, which results in net proceeds from the offering
of $8,828,055.
No underwriter was used during this offering and no commissions were paid.
15
Item 6. Selected Historical Financial Information
The following consolidated summary sets forth selected financial data for us for
the periods and at the dates indicated. The selected financial data has been
derived from our audited financial statements for the years that ended December
31, 2002, 2001, 2000 and 1999. The following is qualified in its entirety by the
detailed information and the financial statements included elsewhere in this
10K.
Year Ended
December 31,
2002 2001 2000 1999
(Dollars in thousands, except per share data)
Income Statement Data
Gross interest income $ 17,040 $15,267 $ 11,228 $ 5,454
Gross interest expense 6,375 7,950 6,325 2,943
Net interest income 10,665 7,317 4,903 2,511
Provision for possible
loan losses 603 571 513 867
Net interest income after
provision for loan losses 10,062 6,746 4,390 1,644
Non-interest income 1,412 753 444 243
Non-interest expense 8,218 5,934 3,683 2,644
Income (loss) before
income taxes 3,256 1,565 1,150 (757)
Income tax expense (benefit) 1,078 556 389 (433)
Net income (loss) 2,178 1,009 761 (324)
Per Share Data and Shares
Outstanding (1)
Net income, basic 0.36 0.17 0.14 (0.14)
Net income, diluted 0.35 0.17 0.14 (0.14)
Cash dividends - - - -
Book value at end of period 4.04 3.15 2.98 2.32
Tangible book value at
period end 4.04 3.15 2.98 2.32
Weighted average shares
outstanding, basic (1) 6,105 6,000 5,400 2,300
Weighted average shares
outstanding, diluted (1) 6,168 6,000 5,400 2,300
Shares outstanding at
period end (1) 6,008 6,000 6,000 2,400
Shares subscribed at period end 541 - - -
Period-End Balance Sheet Data
Total assets 291,398 214,253 157,390 99,081
Total loans 222,395 179,216 131,086 86,560
Total deposits 263,805 194,011 138,447 87,490
Long-term debt - - - -
Shareholders' equity 26,481 18,891 17,882 11,121
16
Performance Ratios
Return on average assets 0.86% 0.54% 0.58% -0.45%
Return on average
shareholders' equity 9.60% 5.49% 5.26% -3.11%
Average shareholders' equity
to average total assets 8.97% 9.89% 11.10% 14.38%
Net interest margin (2) 4.87% 4.31% 3.99% 3.78%
Asset Quality Ratios
Net charge-offs to average
loans 0.09% 0.06% 0.06% 0.06%
Allowance to period-end
gross loans 1.00% 1.00% 1.00% 1.00%
Nonperforming assets to
gross loans 0.34% 0.06% 0.07% 0.07%
Capital and Liquidity Ratios
Risk-based
Tier 1 capital 11.05% 10.99% 15.24% 13.60%
Total capital 12.11% 12.03% 16.36% 14.70%
Leverage capital ratio 9.51% 9.19% 11.73% 11.45%
Total equity to total assets 9.09% 8.82% 11.36% 11.22%
(1) We have adjusted all share amounts and per share data to reflect a
two-for-one stock split of our common stock in January 2002.
(2) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents our net yield on our
earning assets.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following commentary discusses major components of our business and presents
an overview of our consolidated financial position at December 31, 2002 and 2001
as well as results of operations for the years ended December 31, 2002, 2001 and
2000. This discussion should be reviewed in conjunction with the consolidated
financial statements and accompanying notes and other statistical information
presented elsewhere in this 10-K.
We are not aware of any current recommendations by any regulatory authorities
that, if they were implemented, would have a material effect on our liquidity,
capital resources or results of operations.
Overview
On September 27, 2001, New Peoples Bank's shareholders approved a plan of
reorganization under which they exchanged their common stock for our common
stock. On November 30, 2001, the reorganization was completed and New Peoples
Bank became our wholly owned subsidiary. The accompanying financial information
reflects the financial condition and operations of New Peoples Bank prior to
November 30, 2001 and our consolidated financial condition and operations since
then.
17
Since opening for business on October 28, 1998, we have achieved outstanding
growth. At December 31, 2002, our total assets were $291.4 million, total
deposits were $263.8 million and total loans were $222.4 million.
Our net income for the year ended December 30, 2002 was $2.2 million, compared
to net income of $1.0 million and $761,000 for the years ended December 31, 2001
and 2000, respectively. Net income per share was $.36 for the year ended
December 31, 2002, compared to $.17 and $.14 for 2001 and 2000, respectively.
For the foreseeable future, our management will continue its strategy of
providing personal and customized financial services to individuals, small to
medium size businesses and the professional community. We will strive to serve
the banking needs of our customers by developing personal, hometown
relationships.
Net Interest Income and Net Interest Margin
2002 Compared with 2001
Our net interest income, which equals total interest and dividend income less
total interest expense, increased from $7.3 million for 2001 to $10.7 million
for 2002. The increase was the result of higher average balances and an increase
in the net interest margin.
Our net interest margin, which equals net interest income divided by total
interest earning assets, in 2002 was 4.87%, compared to 4.31% for 2001. The
rates received on earning assets decreased less than the rates paid on deposits,
resulting in the increase in net interest margin. During 2002, interest rates
fell in response to interest rate reductions by the Federal Reserve. However, we
were able to maintain an average yield on loans of 8.28% for 2002, compared to
9.37% for 2001 due to the strong demand for loans that we experienced from our
customers. The average yield on federal funds sold decreased from 4.15% in 2001
to 1.60% in 2002 as a result of the interest rate reductions. The average yield
received on other investments decreased from 6.15% in 2001 to 3.16% in 2002 due
to a general decrease in market interest rates. Consistent with market interest
rate reductions, the average cost of deposits decreased from 5.18% for 2001 to
3.14% for 2002.
2001 Compared with 2000
Our net interest income increased from $4.9 million for 2000 to $7.3 million for
2001. The increase was the result of higher average balances and an increase in
the net interest margin.
Our net interest margin on earnings assets for 2001 was 4.31%, compared to 3.99%
for 2000. The rates on earning assets increased more than the rates paid on
deposits, resulting in the increase in net interest margin. In response to
strong loan demand, the average balance of loans increased $46.6 million and the
average rate received on loans decreased from 9.52% for 2000 to 8.28% for 2001.
The interest rates received on loans, federal funds sold and other investments
decreased in response to a general decrease in market interest rates. Consistent
with market rate decreases, the average cost of deposits decreased from 5.91%
for 2000 to 5.18% for 2001.
18
The following table shows the rates paid on earning assets and deposit
liabilities for the periods indicated.
NEW PEOPLES BANKSHARES, INC.
NET INTEREST MARGIN ANALYSIS
AVERAGE BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 AND 2000
(In Thousands of Dollars)
2002 2001 2000
Average Average Average
Rates Rates Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
ASSETS
Loans including
fees $201,417 $16,675 8.28% $155,891 $14,602 9.37% $109,316 $10,408 9.52%
Federal Funds
sold 12,501 200 1.60 9,514 395 4.15 10,392 646 6.22
Deposits in other
bank 260 14 5.45
Other investments 5,224 165 3.16 4,388 270 6.15 2,764 160 5.78
----- ---- ----- ----- ---- ----- ----- ---- ----
Total Earning
Assets 219,142 17,040 7.78 169,793 15,267 8.99 122,732 11,228 9.15
------ ------ ------ ------ ----
Allowance for loans losses (2,003) (1,573) (1,082)
Non-earning assets 28,389 17,649 8,736
-------- -------- -----
Total Assets $245,528 $ 185,869 $130,386
======= ========= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits
Demand - Interest bearing $ 13,253 $ 194 1.46% $ 5,945 $ 120 2.02 $ 3,958 98 2.48
Savings 18,862 364 1.93 12,912 379 2.94 7,900 314 3.97
All other time deposits 170,999 5,817 3.40 134,502 7,451 5.54 95,136 5,913 6.22
------- ------ ---- -------- ------ ---- ------- ------ ----
Total Deposits 203,114 6,375 3.14 153,359 7,950 5.18 106,994 6,325 5.91
------ ---- ----- ---- ------ ----
Non-interest bearing deposits 20,901 12,886 8,074
Other liabilities 1,340 1,197 847
----- ----- ----
Total Liabilities 225,355 167,442 115,915
Stockholder's Equity 20,173 18,427 14,471
-------- -------- ------
Total Liabilities and
Stockholder's Equity $ 245,528 $185,869 $130,386
======== ======= =======
Net Interest Income $ 10,665 $ 7,317 $ 4,903
====== ====== ======
Net Yield on Interest
Earning Assets 4.87% 4.31% 3.99%
===== ===== ====
Net Interest Spread 4.64% 3.81% 3.24%
===== ===== ====
(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.
19
Net interest income is affected by changes in both average interest rates and
the average volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth the amounts of the total changes
in interest income and expense which can be attributed to rate (change in rate
multiplied by old volume) and volume (change in volume multiplied by old rate)
for the periods indicated. The change in interest due to both volume and rate
has been allocated to the change due to rates.
Volume and Rate Analysis
(in thousands)
2002 Compared to 2001 2001 Compared to 2000
--------------------- ---------------------
Increase (Decrease) Increase (Decrease)
Change in Change in
Interest Interest
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
Interest Income:
Loans $4,264 $(2,191) $2,073 $4,434 $ (240) $4,194
Federal funds sold 124 (319) (195) (55) (196) (251)
Deposits in other
banks (14) (14)
Other investments 51 (156) (105) 94 16 110
----- ----- ----- ----- ----- -----
Total Earning Assets 4,439 (2,666) 1,773 4,459 (420) 4,039
----- ------ ----- ----- ----- -----
Interest Bearing Liabilities
Demand 148 (74) 74 49 (27) 22
Savings 175 (190) (15) 199 (134) 65
All other time
deposits 2,022 (3,656) (1,634) 2,447 (908) 1,539
----- ------ ------ ----- ----- -----
Total Interest Bearing
Liabilities 2,345 (3,920) (1,575) 2,695 (1,069) 1,626
----- ------ ------ ----- ------ -----
Change in Net Interest
Income $2,094 $1,254 $3,348 $1,764 $ 649 $2,413
===== ===== ===== ===== ===== =====
20
Interest Sensitivity
At December 31, 2002, we had a negative cumulative gap rate sensitivity ratio of
34.34% for the one year repricing period, compared to 33.00% at December 31,
2001. This generally indicates that earnings would improve in a declining
interest rate environment as liabilities reprice more quickly than assets.
Conversely, earnings would probably decrease in periods during which interest
rates are increasing. 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 year.
Interest Sensitivity Analysis
December 31, 2002
(dollars in thousands)
1-90 91-365 Over 5
Uses of Funds Days Days 2003 2004 2005 2006 Years Total
- ------------- ---- ---- ---- ---- ---- ---- ----- -----
Loans $24,116 $56,369 $ 28,549 $20,331 $24,371 $ 31,507 $ 37,152 $222,395
Federal funds sold 6,123 6,123
Total investments 11,984 21,513 808 539 34,844
------ ------ ------- ------ ------- ------- ------- -------
Total 42,223 77,882 28,549 21,139 24,371 31,507 37,691 263,362
------ ------ -------- ------ ------ -------- ------- -------
Sources of Funds
Deposits
Demand and
savings 36,837 36,837
Time deposits < $100M 56,312 74,743 9,446 3,695 8,200 1,604 11 154,011
Time deposits > $100M 16,251 26,219 2,982 1,492 3,090 544 50,578
------- ------ ----- ----- ----- ----- ----- -------
Total Deposits 109,400 100,962 12,428 5,187 11,290 2,148 11 241,426
------- -------- ------ ------- ------- ----- ----- -------
Discrete Gap (67,177) (23,080) 16,121 15,952 13,081 29,359 37,680 21,936
Cumulative Gap (67,177) (90,257) (74,136) (58,184) (45,103) (15,744) 21,936
Ratio of Cumulative Gap
To Total Earning Assets -25.56% -34.34% -28.21% -22.14% -17.16% -5.99% 8.33%
21
Provision for Loan Losses
2002 Compared with 2001
The provision for loan losses was $603,000 for 2002 compared with $571,000 for
2001. The allowance for loan losses was $2.2 million at December 31, 2002
(approximately 1% of total loans outstanding). Net loans charged off for 2002
were $171,000 (0.09% of average loans), compared to $89,000 for 2001. Net loans
charged off as a percentage of average loans may increase as our loan portfolio
matures.
2001 Compared with 2000
The provision for loan losses was $571,000 for 2001 compared with $513,000 for
2000. The allowance for loan losses was approximately 1% of loans at the end of
each year. Net loans charged off for 2001 were $89,000 (.06% of average loans),
compared to $67,000 for 2000.
The calculation of the allowance for loan losses is considered a critical
accounting policy. Although we have experienced lenders who are familiar with
their customer base, most loans are too new to have exhibited signs of weakness
and the bank does not have an adequate history of loan losses to develop
accurate risk factors. In calculating the amount of the allowance for loan
losses we use guidelines that have been traditionally recommended by the bank
regulatory agencies. At each balance sheet date, we adjust the allowance to
equal the larger of 1% or an amount calculated by multiplying a loss factor
times the amount of loans in each risk classification pool. The pools and loss
factors used in this calculation are as follows: loss-100%, doubtful-50%,
substandard-10%, special mention-1%, pass-.5%. In addition we consider current
economic conditions, changes in the nature and volume of the loan portfolio, and
known adverse factors that may affect the borrowers ability to repay. We intend
to continue to set the allowance at a minimum of 1% unless there is a clear
indication that a 1% allowance is not appropriate.
As the loan portfolio matures, a loss rate specific to us will emerge and these
loss percentages will be applied to the loan portfolio. This will result in a
more accurate allowance for loan loss calculation that is tailored to reflect
the risk associated with our loan portfolio.
The allowance for loan losses represents management's best estimate of the
probable loan losses incurred as of each balance sheet date.
Loan officers initially grade the loans and a loan processor reviews the grade
for appropriateness. In addition, a credit analyst reviews all loans in excess
of $500,000 to one borrower. On a continuous basis, we downgrade loans if
necessary based on recommendations of loan officers, review of pass due loans,
and recommendations of examiners and auditors.
22
The following table provides a summary of the activity in the allowance for loan
losses.
Analysis of the Allowance for Loan Losses
(dollars in thousands)
Year Ended December
Activity 2002 2001 2000 1999
Beginning Balance $1,793 $1,311 $ 865 $ 0
----- ----- ----- -----
Provision charged to expense 603 571 513 867
----- ----- ----- -----
Loan Losses:
Installment loans to
individuals (207) (98) (70) (2)
Recoveries:
Installment loans to
individuals 36 9 3 -
----- ----- ----- -----
Net Loan Losses (171) (89) (67) (2)
----- ----- ----- ------
Balance at End of Period $2,225 $1,793 $1,311 $ 865
===== ===== ===== =====
Allowance for loan losses
as a percentage
of year end losses 1.00% 1.00% 1.00% 1.00%
==== ==== ==== ====
We have allocated the allowance according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred within each of
the categories of loans. The allocation of the allowance as shown in the
following table should not be interpreted as an indication that loan losses in
future years will occur in the same proportions or that the allocation indicates
future loan loss trends. Furthermore, the portion allocated to each loan
category is not the total amount available for future losses that might occur
within such categories since the total allowance is a general allowance
applicable to the entire portfolio.
The allocation of the allowance for loan losses is based on our judgment of the
relative risk associated with each type of loan. We have not based the
allocation of the allowance on an analysis of problem loans since those loans
are insignificant. We have allocated 6% of the allowance to cover real estate
loans, which reflects their lower risk. Residential mortgage loans are secured
by real estate whose value tends to be easily ascertainable. These loans are
made consistent with appraisal policies and real estate lending policies, which
detail maximum loan-to-value ratios and maturities. We have allocated 20% of the
allowance to commercial loans, which have more risk than residential real estate
loans. Commercial business loans typically are made on the basis of the
borrower's ability to make repayment from cash flow from its business and are
secured by business assets, such as commercial real estate, accounts receivable,
equipment and inventory. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself.
23
We have allocated 49% of the allowance to consumer installment loans. Consumer
installment loans entail greater risk than commercial or real estate loans,
because the loans may be unsecured, such as lines of credit, or secured by
rapidly depreciable assets such as automobiles. In addition, consumer loans
collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be ad versely affected by job loss, divorce, illness
or personal bankruptcy. Losses related to consumer loans have been influenced by
the increase in personal bankruptcies. To date, all of the loans charged off by
the bank, have been consumer loans. We have left 25% of the allowance
unallocated, which is available to absorb losses in excess of the amounts
allocated to specific loan categories. We are not aware of any significant
changes in the composition of the loan portfolio or known risk factors that
would result in a change the allocation of the allowance for loan losses during
the periods presented.
The following table shows the balance and percentage of our allowance for loan
losses allocated to each major category of loans.
Allocation of the Allowance for Loan Losses
(dollars in thousands)
December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999
Percent Percent Percent Percent Percent Percent Percent Percent
of of of of of of of of
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
Analysis of Ending Balance
Commercial $ 445 20% 19.32% $ 359 20% 19.62% $ 262 20% 22.84% $ 173 20% 26.94%
Real estate
mortgage 134 6% 61.45% 108 6% 56,96% 79 6% 55.22% 52 6% 50.34%
Installment 1,090 49% 19.23% 879 49% 23.42% 642 49% 21.94% 424 49% 22.72%
Unallocated 556 25% 447 25% 328 25% 216 25%
----- --- ------ ----- --- ------ ----- --- ------ ------ --- ------
Total $2,225 100% 100.00% $1,793 100% 100.00% $1,311 100% 100.00% $ 865 100% 100.00%
===== === ====== ===== === ====== ===== === ====== ===== === ======
The allowance for loan losses was not allocated at December 31, 1998.
Nonaccrual loans and loans past due 90 days or more and still accruing are shown
in the following schedule. Loans past due 90 days or more are classified as
nonaccrual unless the loan is well secured and in the process of collection.
Nonaccrual loans did not have a significant impact on interest income in any of
the periods presented. Management has not identified any additional loans as
"troubled debt restructurings" or "potential problem loans."
24
Non-Accrual and Past Due Loans
(dollars in thousands)
December 31,
Principal: 2002 2001 2000 1999 1998
Non-accrual and past
due loans:
Non-accruing loans $ 761 $ 47 $ 73 $ - $ -
Loans and past due
90 days or more
and still accruing - 29 23 77 -
----- ----- ----- ----- -----
Total $ 761 $ 76 $ 96 $ 77 $ -
===== ===== ===== ===== =====
Percent of total loans 0.34% 0.04% 0.07% 0.09% N/A
==== ==== ==== ==== ===
Noninterest Income
2002 Compared with 2001
Noninterest income increased from $753,000 in 2001 to $1,412,000 in 2002. The
increase is consistent with the growth in our average assets and deposits. The
major sources of noninterest income include overdraft fees on deposit accounts
and insurance commissions. The overdraft fees increased from $458,000 for
2001 to $660,000 for 2002. Insurance commissions decreased from $108,000 for
2001 to $103,000 for 2002. In addition, income produced by bank owned life
insurance purchased during the fourth quarter of 2001 increased from $69,000 for
2001 to $457,000 for 2002. Noninterest income as a percentage of average assets
increased from .40% in 2001 to .58% in 2002.
2001 Compared with 2000
Noninterest income increased from $444,000 in 2000 to $753,000 in 2001. The
increase is consistent with the growth in our average assets and operations. In
addition, noninterest income for 2001 included $69,000 of income produced by
bank owned life insurance purchased during the fourth quarter of 2001.
Noninterest income as a percentage of average assets increased from .34% in 2000
to .40% in 2001.
Noninterest Expense
2002 Compared with 2001
Noninterest expense increased from $5.9 million in 2001 to $8.2 million in 2002.
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 of average assets increased from 3.15% for 2001 to 3.35% for 2002.
Noninterest expense in the future will depend on our growth and the number of
new branch locations.
2001 Compared with 2000
Noninterest expense increased from $3.7 million in 2000 to $5.9 million in 2001.
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 of average assets increased from 2.82% in 2000 to 3.15%
for 2001.
25
Income Taxes
Due to timing differences between book and tax treatment of several expense
items, a deferred tax liability of $134,738 has been recognized at December 31,
2002. The deferred tax liability represents increases to future income tax
liabilities from future reduced deductions for depreciation and increases to
income from unrealized accretion and unrealized BOLI income. Our income tax
expense was computed at the normal corporate income tax rate of 34% of taxable
income included in net income. We do not have significant nontaxable income or
nondeductible expenses.
Loans
We have had a continued strong loan demand and total loans increased $44.6
million during 2000, $48.2 million during 2001 and $43.4 million during 2002. A
schedule of loans by type is set forth immediately below. Approximately 61% of
the loan portfolio is secured by real estate.
Loans receivable outstanding are summarized as follows:
Loan Portfolio
(in thousands)
December 31,
2002 2001 2000 1999 1998
-----------------------------------------
Commercial, financial and
agricultural $42,959 $35,168 $29,941 $23,321 $6,229
Real estate
- construction 5,615 3,845 1,528 2,285 193
Real estate - mortgage 131,051 98,229 70,858 41,288 4,236
Installment loans to
individuals 42,770 41,974 28,759 19,666 2,681
------ ------ ------ ------ -----
Total $222,395 $179,216 $131,086 $86,560 $13,339
======= ======= ======= ====== ======
Our loan maturities as of December 31, 2002 are shown in the following table.
Maturities of Loans
(in thousands)
Maturity Range
1-90 91-365 Over
Days Days 2003 2004 2005 2006 5 Years Total
---- ---- ---- ---- ---- ---- ------- -----
Commercial and
agricultural loans $ 9,982 $ 26,748 $ 10,887 $ 8,353 $ 11,784 $ 14,085 $ 18,593 $100,432
Real estate 4,291 12,811 4,915 3,322 8,200 15,992 16,883 66,414
Consumer - installment/
other 9,843 16,808 12,748 8,657 4,386 1,431 1,676 55,549
------- ------- ------- ------- ------- ------- ------- -------
Total $ 24,116 $ 56,367 $ 28,550 $ 20,332 $ 24,370 $ 31,508 $ 37,152 $222,395
======= ======= ======= ======= ======= ======= ======= =======
Loans with
predetermined
rates $ 16,450 $ 26,843 $ 19,537 $ 14,407 $ 14,104 $ 10,472 $ 30,359 $132,172
Loans with variable or
adjustable rates 7,666 29,524 9,013 5,925 10,266 21,036 6,793 90,223
------- ------- ------- ------- ------- ------- ------- -------
Total $ 24,116 $ 56,367 $ 28,550 $ 20,332 $ 24,370 $ 31,508 $ 37,152 $222,395
======= ======= ======= ======= ======= ======= ======= =======
26
This table reflects the earlier of the maturity or repricing dates for various
assets and liabilities at December 31, 2002. In preparing this 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.
Investment Securities
Total investment securities decreased from $11.9 million at December 31, 2000 to
$5.7 million at December 31, 2001 and increased to $34.3 million at December 31,
2002. We had no available for sale securities at December 31, 2001 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. At December 31,
2002, we had short term U.S. Government agency notes with a book value of $12.0
million that matured in the first quarter of 2003.
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.
The carrying values of investment securities are shown in the following table:
Investment Securities Portfolio
(in thousands)
December 31,
2002 2001 2000 1999
-------------------------------------
Securities Available for Sale
U. S. Treasury and other U.S.
Government agencies and
corporations $ - $ - $ 8,913 $ -
Securities Held to Maturity
U. S. Treasury and other U. S.
Government agencies and
corporations 34,204 $ 5,556 $ 2,858 $ -
States and political
subdivisions 101 102 102 -
------ ------ ------- ------
Total $34,305 $ 5,658 $ 11,873 $ -
====== ====== ======= ======
The amortized cost, fair value and weighted average yield of investment
securities at December 31, 2001 and 2002, by contractual maturity, are shown in
the following schedule. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
27
Maturities of Securities
(dollars in thousands)
Weighted
Amortized Fair Average
Cost Value Yield
December 31, 2001
Securities held to Maturity
U.S. Treasury and Agency
Due within one year $ 3,499 $ 3,499 1.65%
Due after one year through
five years $ 2,057 $ 2,100 7.00%
------ ------ ----
$ 5,556 $ 5,599 3.63%
------ ------ ----
Municipal Governments
Due after one year through
five years $ 102 $ 106 5.00%
------ ------- ----
$ 102 $ 106 5.00%
------ ------- ----
Total $ 5,658 $ 5,705 3.65%
====== ======= ====
December 31, 2002
U.S. Treasury and Agency
Due within one year $33,497 $ 33,539 3.85%
------ ------- ----
$33,479 $ 33,539 3.85%
------ ------- ----
Municipal Governments
Due after one year through
five years $ 808 $ 818 3.26%
------ ------- ----
$ 808 $ 818 3.26%
------ ------- ----
Total $34,305 $ 34,357 3.84%
====== ======= ====
The carrying amount of securities pledged by us to secure public deposits was
$2.8 million at December 31, 2002. We are required to hold stock in the Federal
Reserve Bank. The investment in Federal Reserve Bank stock is recorded at cost
of $539,000 as of December 31, 2002 and $529,000 as of December 31, 2001.
Life Insurance
We have life insurance policies on the lives of four officers with three
insurance companies. The total cash surrender value of the policies was $7.5
million and $8.0 million at December 31, 2001 and December 31, 2002,
respectively. These policies yielded 6.19%, less a mortality cost of
approximately .53% for a net return of approximately 5.66% during 2002. The new
interest rate in effect through the end of 2003 is an average of 5.35%.
28
Deposits
We have had excellent growth in our deposits which totaled $194.0 million at
December 31, 2001 and $263.8 million at December 31, 2002. Time deposits of
$100,000 or more equaled approximately 20% of deposits at both December 31, 2001
and 2002. 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.
A breakdown of deposits by type is shown in our consolidated balance sheets.
Maturities of time certificates of deposit of $100,000 or more outstanding are
summarized as follows:
Maturities of Time Deposits
(in thousands)
December 31,
2002 2001 1999
Three months or less $16,251 $ 16,010 $13,086
Over three months through twelve months 26,219 12,508 21,580
Over one year through three years 4,474 6,244 3,410
Over twelve months 3,634 4,941 772
------ ------- ------
Total $50,578 $ 39,703 $38,848
====== ======= ======
Capital
Capital as a percentage of total assets was 9.09% at December 31, 2002 compared
to 8.82% at December 31, 2001, and 11.36% at December 31, 2000, which exceeded
regulatory requirements. Our required and actual risk based capital ratios at
both dates are set forth immediately below. We are considered to be well
capitalized under the regulatory framework for prompt corrective action at this
time. However, it will be necessary to obtain additional capital in the future
to support our rapid growth.
29
Capital Amounts and Ratios
(dollars in thousands)
Minimum Minimum To Be Well
Capital Capitalized Under Prompt
Actual Requirement Corrective Action
Amount Ratio AmountRatio Amount Ratio
December 31, 2002
Total Capital to
Risk
Weighted Assets: $ 25,564 12.11% $16,893 8% $ 21,11 6 10%
Tier 1 Capital to
Risk
Weighted Assets: 23,339 11.05% 8,446 4% 12,670 6%
Tier 1 Capital to
Average
Assets: 23,339 9.51% 11,372 4% 14,215 5%
December 31, 2001:
Total Capital to
Risk
Weighted Assets: $ 20,684 12.03% $13,760 8% $ 17,200 10%
Tier 1 Capital to
Risk
Weighted Assets: 18,891 10.99% 6,880 4% 10,320 6%
Tier 1 Capital to
Average
Assets: 18,891 9.19% 8,226 4% 10,283 5%
December 31, 2000:
Total Capital to Risk
Weighted Assets $ 19,194 16.36% $ 9,385 8% $ 11,730 10%
Tier 1 Capital to
Risk
Weighted Assets: 17,882 15.24% 4,692 4% 7,038 6%
Tier 1 Capital to
Average
Assets: 17,882 11.73% 6,098 4% 7,622 5%
Liquidity
We had liquid assets of approximately $11.5 million at December 31, 2001 and
$14.9 million at December 31, 2002 in the form of cash, due from banks and
federal funds sold. We believe that our liquid assets were adequate at both
dates. 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.
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 2002 alone, we have opened five new branches and plan to open additional
branches before the end of 2003.
30
As of December 31, 2002, we had time deposits of $173.5 million that mature
within one year. Historically, we have been able to retain approximately 90% of
maturing deposits by offering current market rates. We continue to offer premium
rates at our new branches to attract new customers and deposits. We anticipate
that we will be able to retain a large percentage of our maturing time deposits
and will experience a net growth in deposits by attracting new customers at our
new branches as well as at our existing branches.
Analysis of Cash Flows
Our significant cash flows are as follows:
Year Ended
December 31,
2002 2001 2000 1999
Cash was Provided by
Operations $ 3,694 $ 1,372 $ 1,583 $ (118)
Investment activities
Maturity of securities 3,500 9,714 28,913 -
Withdrawal of deposits in
other banks - - 859 1,671
Financing Activities
Sale of common stock 5,412 - 6,000 817
Growth in deposits 69,794 55,564 50,957 60,536
------ ------ ------ ------
Total $82,400 $66,650 $88,312 $62,906
====== ====== ====== ======
Cash was used for Investing
Activities
Growth in loans $43,351 $48,219 $44,594 $73,222
Purchase of property, plant
and equipment 3,572 3,757 2,081 1,219
Investment in life insurance
agreements -7,500 - -
Purchase of securities 32,232 3,499 40,960 18
------ ------ ------ -----
Total $79,155 $62,975 $87,635 $74,459
====== ====== ====== ======
We originally capitalized our company in 1998 with $11.1 million received
through an offering of our common stock. In 2000, we increased our capital by an
additional $6.0 million through another offering of our common stock. During
2002, we raised an additional $5.4 million through a common stock offering that
ended on February 7, 2003. Total capital raised by this most recent offering
totaled $8.8 million net of related expenses. The additional capital was
necessary to support our growth and to maintain acceptable capital ratios.
We have been successful in attracting new customers and deposits by
establishing branches in attractive locations and offering premium rates to new
customers. The growth in deposits is sensitive to interest rates and we can
control the growth by increasing or decreasing the interest rates paid. We
anticipate that we will continue to offer premium rates for deposits at our new
branch locations.
We have used the funds provided by common stock issues and deposits to fund the
purchase of banking facilities and our loan portfolio. We continue to have a
strong demand for our loan products and have a loan to deposit ratio of 85% at
December 31, 2002. To manage the growth in our loan portfolio, we can vary the
interest rates charged or limit the amount of new loans approved.
31
The growth in loans and deposits does not always occur in the same time period
and the excess or deficit of funds provided affects the amount that we retain in
cash or invest in fed funds or short-term investments. Our practice has been to
invest available funds in short-term U.S. treasury and agency securities in
order to provide liquidity or to provide income until the funds are needed for
new loans.
Item 7A. Market and Interest Rate Risk Management
Market risk is the risk of loss due to adverse changes in current and future
cash flows, fair values, earnings or capital due to adverse movements in
interest rates and other factors, including foreign exchange rates and commodity
prices. Because we have no significant foreign exchange activities and hold no
commodities, 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. Changes in the interest rates earned and
paid also affect the estimated fair value of our interest bearing assets and
liabilities.
Our Asset and Liability Committee has been delegated the responsibility of
managing our interest-sensitive balance sheet accounts to maximize earnings
while managing interest rate risk. The committee, comprised of various members
of senior management, is also responsible for establishing policies to monitor
and limit our exposure to interest rate risk and to manage our liquidity and
capital positions. The committee satisfies its responsibilities through
quarterly meetings during which product pricing issues, liquidity measures
and interest sensitivity positions are monitored.
In December 2001, our board of directors approved a revised asset/liability
management policy, and the committee implemented significant modifications to
its methodology and processes for managing our interest rate risk. Most notably,
we implemented an asset/liability management and simulation software model,
which is used to periodically measure the potential impact on net interest
income of projected or hypothetical changes in interest rates.
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 December 31, 2002 and
2001. 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
December 31,
2002 2001
+300 (4.67)% (4.72)% (20.00)%
+200 (3.10) (3.17) (15.00)
+100 (1.55) (1.64) (7.00)
-100 2.13 2.22 (7.00)
-200 4.09 4.89 (15.00)
-300 1.95 8.69 (20.00)
32
The type of modeling used to generate the above 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.
The committee is also responsible for long-term asset/liability management and
completes the following functions:
o Monitoring available opportunities to undertake major corrective actions
(in the nature and mix of assets and liabilities)for structural mismatches.
o Determining the appropriateness of fixed rate vs. variable rate lending
and investment strategies and formulation policies to influence this
activity.
o Developing parameters for the investment portfolio in the context of
overall balance sheet management (liquidity, interest rate risk, credit
risk, risk-based capital, price risk, and earnings).
o Establishing financial goals, including minimum standards for return
on assets and equity.
o Overseeing the long-term strategic use of capital to maximize the
return on equity within reasonable levels of risk.
33
Item 8. Financial Statements
CONTENTS
Page
Independent Auditors' Report 34
Consolidated Balance Sheets as of
December 31, 2002 and 2001 35
Consolidated Statements of Income - Years Ended
December 31, 2002 and 2001 36
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 2002 and 2001 37
Consolidated Statements of Cash Flows - Years Ended
December 31, 2002 and 2001 38
Notes to Consolidated Financial Statements 39
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
New Peoples Bankshares, Inc.
Honaker, Virginia
We have audited the consolidated balance sheets of New Peoples Bankshares, Inc.
and subsidiary as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Peoples
Bankshares, Inc. and subsidiary as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/S. B. Hoover & Company, L.L.P.
January 17, 2003
Harrisonburg, Virginia
35
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---- ----
Cash and due from banks (Note 3) $ 8,815,523 $ 8,160,163
Federal funds sold 6,123,000 3,387,000
------------ ------------
Total Cash and Cash Equivalents 14,938,523 11,547,163
Investment Securities
Held to maturity, fair value of $34,356,811
in 2002 and $5,704,751 in 2001
(Note 4) 34,304,596 5,657,937
------------ ------------
Loans receivable (Note 5) 222,394,898 179,215,539
Allowance for loan losses (Note 6) (2,224,487) (1,792,850)
------------- ------------
Net Loans 220,170,411 177,422,689
Bank premises and equipment, net (Note 7) 10,915,165 8,365,639
Federal Reserve Bank stock (restricted)
(Note 4) 538,950 529,250
Accrued interest receivable 1,846,231 1,637,979
Life insurance investments 7,987,882 7,568,904
Other assets 696,555 1,523,493
------------ ------------
Total Assets $ 291,398,313 $ 214,253,054
=========== ============
LIABILITIES
Deposits:
Demand deposits:
Noninterest bearing $ 22,379,395 $ 15,798,126
Interest-bearing 9,711,423 7,535,247
Savings deposits 27,125,922 18,646,950
Time deposits (Note 8) 204,588,711 152,031,073
------------ ------------
Total Deposits 263,805,451 194,011,396
Accrued interest payable 702,260 687,354
Accrued expenses and other liabilities 409,374 663,230
------------ ------------
Total Liabilities 264,917,085 195,361,980
------------ ------------
STOCKHOLDERS' EQUITY (Notes 12 & 15)
Common stock - $2.00 par value; 12,000,000
shares authorized; 6,008,393 and
6,000,000 shares issued and outstanding
for 2002 and 2001, respectively 12,016,786 12,000,000
Paid-in-surplus 5,948,505 5,964,331
Stock Subscriptions 5,410,900
Retained earnings 3,105,037 926,743
------------ ------------
Total Stockholders' Equity 26,481,228 18,891,074
------------ ------------
Total Liabilities and Stockholders'
Equity $ 291,398,313 $ 214,253,054
=========== ============
The accompanying notes are an integral part of this statement.
36
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
INTEREST AND DIVIDEND INCOME 2002 2001 2000
---- ---- ----
Loans including fees $16,674,854 $14,602,070 $10,407,770
Federal funds sold 200,248 395,164 646,374
Deposits in other banks 14,131
U.S. Treasury securities 133,176 237,778 134,255
Dividends on Federal Reserve
Bank stock 31,865 31,755 25,515
-------- -------- ---------
Total Interest and Dividend
Income 17,040,143 15,266,767 11,228,045
---------- ---------- ----------
INTEREST EXPENSE
Deposits
Demand 106,715 120,076 98,309
Savings 450,589 378,511 313,738
Time deposits below $100,000 4,289,264 5,570,090 4,387,005
Time deposits above $100,000 1,528,106 1,881,463 1,525,839
--------- --------- ---------
Total Interest Expense 6,374,674 7,950,140 6,324,891
--------- --------- ---------
NET INTEREST INCOME 10,665,469 7,316,627 4,903,154
PROVISION FOR LOAN LOSSES (Note 6) 603,000 571,000 513,400
---------- -------- ---------
Net Interest Income after
Provision for Loan Losses 10,062,469 6,745,627 4,389,754
---------- ---------- ---------
NONINTEREST INCOME
Service charges 662,598 457,396 323,899
Fees, commissions and
other income 292,516 226,317 119,670
Life insurance investment
income 456,825 68,904
-------- -------- ---------
Total Noninterest Income 1,411,939 752,617 443,569
--------- -------- ---------
NONINTEREST EXPENSES
Salaries and employee
benefits (Note 11) 4,431,131 3,402,878 2,168,474
Occupancy expense 457,839 260,320 183,650
Equipment expense 917,473 707,428 415,470
Advertising and public relations 189,635 125,839 102,342
Stationery and supplies 210,937 149,529 94,516
Other operating expenses 2,010,733 1,287,150 718,646
--------- --------- ---------
Total Noninterest Expenses 8,217,748 5,933,144 3,683,098
--------- --------- ---------
Income before Income Taxes 3,256,660 1,565,100 1,150,225
INCOME TAX EXPENSE (Note 9) 1,078,366 556,435 389,153
--------- -------- ---------
NET INCOME $2,178,294 $1,008,665 $ 761,072
========= ========= =========
Earnings Per Share (1)
Basic .36 .17 .14
========= ========= ==========
Fully Diluted .35
========= ========= =========
Average Weighted Shares of
Common Stock (1) 6,104,734 6,000,000 5,400,000
========= ========= =========
(1) Earnings per share and average weighted shares of common stock have been
restated to reflect the 2 for 1 stock split which occurred on January 1, 2002.
The accompanying notes are an integral part of this statement.
37
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Retained
Shares of Common Earnings
Common Commo n Paid in Stock (Accumulated
Stock Stock Surplus Subscriptions Deficit) Total
Balance, December 31,
1999 1,200,000 $4,800,000 $ 7,164,331 $ $(842,994) $11,121,337
Stock Dividend 1,200,000 4,800,000 (4,800,000)
Common Stock Sold 600,000 2,400,000 3,600,000 6,000,000
Net Income 761,072 761,072
--------- --------- --------- -------- -------- ----------
Balance, December 31,
2000 3,000,000 12,000,000 5,964,331 (81,922) 17,882,409
Net Income 1,008,665 1,008,665
--------- ---------- ---------- -------- --------- ----------
Balance, December 31,
2001 3,000,000 12,000,000 5,964,331 926,743 18,891,074
Stock Split 3,000,000
Stock Options Exercised 2,534 5,068 13,937 19,005
Common Stock Subscribed 5,469,490 5,469,490
Common Stock Issued 5,859 11,718 46,872 (58,590)
Cost of Common Stock
Offering (76,635) (76,635)
Net Income 2,178,294 2,178,294
--------- ---------- --------- --------- --------- ---------
Balance, December 31,
2002 6,008,393 $12,016,786 $5,948,505 $5,410,900 $3,105,037 $26,481,228
========= ========== ========= ========= ========= ==========
The accompanying notes are an integral part of this statement.
38
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,178,294 $ 1,008,665 $ 761,072
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 866,492 593,997 373,359
Provision for loan losses 603,000 571,000 513,400
Income (less expenses) on
life insurance (418,978) 68,904
Loss on sale of foreclosed
real estate 71,577 87,520
Amortization of bond premiums 85,748
Deferred tax benefit 346,900 (50,690) 271,733
Loss on disposal of fixed assets 12,156
Net change in:
Interest receivable (208,252) (263,981) (676,376)
Other assets 202,329 (343,581) (251,608)
Accrued interest payable 14,906 (99,502) 388,080
Accrued expense and other
liabilities (603,144) 387,578 203,139
---------- ---------- ----------
Net Cash Provided by Operating
Activities 3,138,872 1,972,066 1,582,799
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing
deposits in other banks 858,756
Net increase in loans (43,350,722) (48,218,812) (44,593,543)
Purchase of securities
held-to-maturity (32,232,407) (3,498,520) (2,960,184)
Purchase of securities
available-for-sale (37,826,367)
Proceeds from maturities of
securities
available-for-sale 8,913,173 28,913,194
Proceeds from maturities of
securities
held-to-maturity 3,500,000 800,767
Purchase of Federal Reserve
Bank stock (9,700) (173,500)
Payments for the purchase of
property (3,152,316) (4,357,240) (2,081,075)
Proceeds from the sale of property 291,715
Deposits with life insurance
companies (7,500,000)
---------- ---------- ----------
Net Cash Used in Investing
Activities (74,953,430) (53,860,632) (57,862,719)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock
subscriptions 6,000,000
Net proceeds from common stock
offering 5,392,855
Common stock options exercised 19,005
Net change in:
Demand deposits 8,757,445 9,087,755 5,187,605
Savings deposits 8,478,975 9,485,890 3,635,737
Time deposits 52,557,638 36,990,330 42,133,612
---------- ---------- ----------
Net Cash Provided by Financing
Activities 75,205,918 55,563,975 56,956,954
---------- ---------- ----------
Net increase in cash and cash
equivalents 3,391,360 3,675,409 677,034
Cash and Cash Equivalents,
Beginning of Year 11,547,163 7,871,754 7,194,720
---------- ---------- ----------
Cash and Cash Equivalents,
End of Year $14,938,523 $11,547,163 $ 7,871,754
========== ========== ==========
Supplemental Disclosure of Cash Paid
During the Year for:
Interest 6,359,768 8,049,642 5,937,123
Taxes 1,393,983 556,435
Supplemental Disclosure of Non Cash
Transactions:
Loans made to finance sale of
foreclosed real estate 33,000 196,781
The accompanying notes are an integral part of this statement.
39
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 REORGANIZATION:
On September 27, 2001, the shareholders of the New Peoples Bank, Inc.
("the Bank") approved a plan of reorganization under which the
shareholders of the Bank exchanged their common stock for common stock
in New Peoples Bankshares Inc. ("New Peoples"). On November 30, 2001,
the reorganization was completed on a pooling of interest basis and the
Bank became a wholly owned subsidiary of New Peoples. The accompanying
financial statements reflect the transactions of the Bank for the years
2001 and 2000 and of New Peoples since its inception on July 12, 2001.
The revenue and net income for each of the companies from January 1,
2001 until November 30, 2001 is shown in the following schedule:
Revenue Net Income
New Peoples $ -0- $(32,749)
Bank 14,526,262 1,000,137
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations - New Peoples is a bank holding company whose
principal activity is the ownership and management of a community bank.
New Peoples subsidiary 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 southwest Virginia.
Consolidation Policy - The consolidated financial statements include
New Peoples and the Bank. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Investment Securities - Investment securities which the Bank intends to
hold until maturity or until called are classified as Held to Maturity.
These investment securities are carried at cost, adjusted for
amortization of premium and accretion of discounts using the effective
interest method.
Investment securities, which the Bank intends to hold for indefinite
periods of time, are classified as Available for Sale. These investment
securities are carried at fair value. At December 31, 2002 and 2001,
there were no securities classified as Available for Sale.
Loans and Allowance for Loan Losses - Loans are carried on the balance
sheet net of any unearned interest and the allowance for loan losses.
Interest income on loans is computed using the effective interest
method, except where serious doubt exists as to the collectibility of
the loan, in which accrual of the income is discontinued.
40
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Loans and Allowance for Loan Losses (Continued) - In addition, loans
are placed on non-accrual status when the loan has been in default for
a period of 90 days or more unless the loan is both well secured and in
the process of collection. Loans are returned to accrual status when
the loan has been brought current according to it contractual terms and
prospects for future contractual payments are no longer in doubt.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance
for loan losses when management believes that collectibility
of the principal is unlikely. The allowance for loan losses is
evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans,
industry historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant
revision as more information becomes available.
Bank Premises and Equipment - Land, buildings and equipment are
recorded at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the following estimated
useful lives.
Type Estimated useful life
Buildings 39 years
Paving and landscaping 15 years
Computer equipment and software 3 to 5 years
Vehicles 5 years
Furniture and equipment (other) 5 to 7 years
Advertising Cost - Advertising costs are expensed in the period
incurred.
Stock Options - New Peoples accounts for stock options using the
"intrinsic value method" described in Accounting Principles Board
Opinion 25.
Income Taxes - Deferred income tax assets and liabilities are
determined using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is determined based on
the tax effects of the temporary differences between the book and tax
bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
Cash and Cash Equivalents - Cash and cash equivalents as used in the
cash flow statements includes cash and due from banks and federal funds
sold.
Earnings Per Share - Earnings per share represent both basic and
diluted earnings per share using the treasury stock method.
Weighted average shares outstanding at December 31, 2002 included
outstanding stock subscriptions as a result of the ongoing stock
offering at December 31, 2002.
NOTE 3 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
The Bank had cash on deposit and federal funds sold to other commercial
banks amounting to $10,048,272 and $8,346,190 at December 31, 2002 and
2001, respectively. Deposit amounts at other commercial banks may, at
times, exceed federally insured limits.
41
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and estimated fair value of securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Held to Maturity
December 31, 2002
U.S. Government
agencies $34,203,529 $ 56,916 $ 10,613 $34,249,832
Municipal governments 101,067 5,912 106,979
-------- -------- -------- --------
Total Securities Held
to Maturity $34,304,596 $ 62,828 $ 10,613 $34,356,811
=========== ======== ======== ==========
At December 31, 2002, the Company had not identified any securities as
available for sale.
Securities Held to Maturity
December 31, 2001
U.S. Government
agencies $5,555,840 $ 43,027 $ $5,598,867
Municipal governments 102,097 3,787 105,884
-------- -------- -------- ---------
Total Securities Held to
Maturity $5,657,937 $ 46,814 $ $5,704,751
========= ======== ======= =========
At December 31, 2001, the Company had not identified any securities as
available for sale.
The amortized cost and fair value of investment securities at December
31, 2002, 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.
Securities Held to Maturity
--------------------------- Weighted
Amortized Fair Average
Cost Value Yield
------------ ----- -----------
Due within one year $33,496,960 $33,538,683 3.66%
Due after one year through
five years 807,636 818,128 3.26%
--------- --------- ----
Total $34,304,596 $34,356,811 3.65%
========== =========== ====
The carrying amount of securities pledged by the Bank to secure public
deposits amounts to $2,807,636 at December 31, 2002.
The Bank is required to hold stock in the Federal Reserve Bank. The
investment in Federal Reserve Bank stock is recorded at cost of
$538,950 and $529,250 as of December 31, 2002 and 2001,
respectively.
42
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 LOANS:
Loans receivable outstanding at December 31, are summarized as follows:
(Rounded to the nearest thousand.)
2002 2001
Commercial, financial and agricultural $ 42,959,000 $ 35,168,000
Real estate - construction 5,615,000 3,845,000
Real estate - mortgages 131,051,000 98,229,000
Installment loans to individuals 42,770,000 41,974,000
---------- ----------
Loans Receivable $222,395,000 $179,216,000
=========== ===========
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses are as
follows:
2002 2001 2000
---- ---- ----
Balance, beginning of year $1,792,850 $1,311,348 $ 865,268
Provision charged to operating
expenses 603,000 571,000 513,400
Recoveries of loans charged
off 35,591 8,495 2,928
Loans charged off (206,954) (97,993) (70,248)
--------- --------- ---------
Balance, End of Year $2,224,487 $1,792,850 $1,311,348
========= ========= =========
Percentage of Loans 1.00% 1.00% 1.00%
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment at December 31, are summarized as follows:
2002 2001
Land $2,188,937 $2,102,800
Buildings and improvements 6,557,287 4,159,520
Furniture and equipment 3,876,615 2,884,850
Vehicles 137,874 101,904
Construction in progress 338,606 434,252
--------- ---------
13,099,319 9,683,326
Less accumulated depreciation (2,184,154) (1,317,687)
Bank Premises and Equipment $10,915,165 $8,365,639
========== =========
Depreciation expense for 2002, 2001 and 2000 was $866,492, $593,997,
and $373,359 respectively.
43
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 OTHER TIME DEPOSITS:
The aggregate amount of time deposits with a minimum denomination of
$100,000 was $50,577,890 and $38,847,562 at December 31, 2002 and 2001,
respectively.
At December 31, 2002, the scheduled maturities of certificates of
deposit are as follows:
2003 $173,525,000
2004 12,428,000
2005 5,187,000
2006 11,290,000
2007 2,148,000
After five years 11,000
----------
Total $204,589,000
===========
NOTE 9 INCOME TAX EXPENSE:
The components of income tax expense for the years ended December 31,
are as follows:
2002 2001 2000
---- ---- ----
Current expense $ 731,466 $ 607,125 $ 117,421
Deferred expense (benefit) 346,900 (50,690) 271,732
--------- --------- ---------
Net Federal Income Tax $1,078,366 $ 556,435 $ 389,153
========= ========= =========
The deferred tax expense (benefit) resulting from temporary
differences for the years ended December 31 is as follows:
2002 2001 2000
---- ---- ----
Organization and start-up
cost $ 18,942 $ 16,762 $ 18,575
Provision for loan losses (161,552) (144,622) (126,410)
Depreciation 363,516 76,786 96,898
Net operating loss utilized 282,669
Unrealized accretion income 3,608
Net earnings on bank owned
life insurance 128,008
Capitalized interest (5,622) 384
--------- --------- ---------
Deferred Income Tax Expense
(Benefit) $ 346,900 $ (50,690) $ 271,732
========= ========= =========
44
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 INCOME TAX EXPENSE (CONTINUED):
The net deferred tax assets and liabilities resulting from temporary
differences as of December 31, are summarized as follows:
2002 2001 2000
---- ---- ----
Deferred Tax Assets:
-------------------
Organization and start-up cost $ 16,925 $ 35,867 $ 52,629
Allowance for loan losses 620,606 459,054 314,432
Capitalized interest 10,603 4,981 5,365
--------- --------- ---------
Total Assets 648,134 499,902 372,426
--------- --------- ---------
Deferred Tax Liabilities:
Accelerated depreciation 651,256 287,740 210,954
Unrealized accretion income 3,608
Net unrealized income on bank
owned life insurance 128,008
--------- --------- ---------
Total Liabilities 782,872 287,740 210,954
--------- --------- ---------
Net Deferred Tax Asset
(Liability) $ (134,738) $ 212,162 $ 161,472
========= ========= =========
The following table summarizes the differences between the actual
income tax expense and the amounts computed using the federal statutory
tax rates:
2002 2001 2000
---- ---- ----
Income tax expense at the
applicable federal rate $1,114,328 $ 532,134 $ 391,077
Permanent differences resulting
from:
Nondeductible expenses 2,602 9,095 743
Tax exempt interest income (14,949)
Other adjustments (23,615) 15,206 (2,667)
--------- --------- ---------
Income Tax Expense $1,078,366 $ 556,435 $ 389,153
========= ========= =========
NOTE 10 RELATED PARTY TRANSACTIONS:
During the year, officers and directors (and companies controlled by
them) were customers of and had transactions with the Company in the
normal course of business. These transactions were made on
substantially the same terms as those prevailing for other customers
and did not involve any abnormal risk.
Loan transactions with related parties are shown in the following
schedule:
2002 2001
Total loans, beginning of year $ 6,070,481 $5,209,080
New loans 805,476 2,800,929
Repayments (1,009,016) (1,939,528)
----------- ----------
Total Loans, End of Year $ 5,866,941 $6,070,481
========== =========
45
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 RETIREMENT PLANS:
The Bank has established a qualified defined contribution plan which
covers all full time employees. Under the plan the Bank matches
employee contributions up to a maximum of 5% of their salary. The Bank
contributed $143,331, $109,998, and $73,480 to the defined contribution
plan for 2002, 2001 and 2000, respectively.
In addition, the Bank has established a salary continuation plan for
key executives, which is funded by single premium life insurance
policies. Expenses related to the plan were $80,332 for 2002.
NOTE 12 COMMON STOCK:
As of December 31, 1999, the Bank had issued and outstanding 1,200,000
shares of $4 par value common stock. On March 15, 2000, the Board
approved a 2 for 1 stock split, effected in the form of a dividend, to
shareholders of record on that date. This split resulted in an
additional 1,200,000 shares of stock outstanding. In addition, the
Board approved a post split sale of 600,000 shares of common stock at
$10 per share. All of those shares were sold and issued, resulting in a
total of 3,000,000 shares issued and outstanding at December 31, 2001.
Effective November 30, 2001, the Bank's common stock was exchanged for
3,000,000 shares of New Peoples common stock on a one for one basis.
On December 12, 2001, the Board approved a 2 for 1 stock split, to
shareholders of record on January 1, 2002, by reducing the par value of
the common stock from $4.00 per share to $2.00 per share.
On October 15, 2002, upon approval from the Securities and Exchange
Commission, 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 07, 2003, after one 30 day extension from the
original sale period. The total number of shares sold under the
offering were 890,469.
NOTE 13 STOCK OPTION PLAN:
New Peoples' stock option plan was adopted on September 27, 2001. The
purpose of the Plan is to reward employees and directors for services
rendered and investment risks undertaken to date and to promote the
success of New Peoples by providing incentives to employees and
directors that will promote the identification of their personal
interest with the long-term financial success of New Peoples and with
growth in shareholder value. The plan provides that options for up to
900,000 shares of New Peoples common stock may be issued to employees
and directors. The exercise price may not be less than 100% of the fair
market value of the shares on the award date. Each award becomes
exercisable in the event of a change in control of New Peoples. All
options are subject to exercise or forfeiture if New Peoples'
capital falls below its minimum requirements, as determined by its
state or federal primary regulators, and New Peoples' primary
regulator so directs. The plan will expire on May 31, 2011, unless
sooner terminated by the Board of Directors. On December 12, 2001,
options to acquire 286,000 shares (on a post stock split basis) were
awarded under the plan; these options have an exercise price of $7.50
per share (subsequent to the 2 for 1 stock split on January 1, 2002)
and have a term of ten years.
46
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 STOCK OPTION PLAN (CONTINUED):
During 2002, a total of 2,534 options were exercised at an option price
of $7.50 per share. As of December 31, 2002, there were 283,466 options
outstanding at an option price of $7.50 per share.
On January 1, 2003 stock options of 79,500 shares were awarded to some
employees and all directors; these options have an exercise price of
$10.00 per share with a term of ten years and an expiration date of
December 31, 2012, with all the same covenants/requirements as the
previous option.
New Peoples applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation cost
has been recognized. Had compensation cost for New Peoples' stock
option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the method prescribed by FASB
Statement No. 123, the net income would have been adjusted to the
proforma amounts indicated below:
2002 2001
Per statement of income $2,178,294 $1,008,665
Cost of options granted
(net of tax effect) (751,360)
--------- ---------
Proforma Net Income $2,178,294 $ 257,305
========= =========
NOTE 14 DEPOSITS WITH LIFE INSURANCE COMPANIES:
The Bank deposited $7,500,000 in October/November 2001 with various
life insurance companies. The deposit had a guaranteed interest rate of
6.19% through the year 2002. The new interest rate through 2003 is an
average of 5.35%.
In 2002, life insurance policies insuring key officers were issued. The
policies are owned by the bank and the income on the policies will be
used to fund a salary continuation plan for the officers.
47
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:
The principal source of funds of New Peoples is dividends paid by the
Bank. The Federal Reserve Act restricts the amount of dividends the
Bank may pay. Approval by the Board of Governors of the Federal Reserve
Systems is required if the dividends declared by a state member bank,
in any year, exceed the sum of (1) net income of the current year and
(2) income net of dividends for the preceding two years. As of January
1, 2003, approximately $3,125,000 was available for dividend
distribution. The Bank declared dividend's payable to New Peoples of
$25,000 for 2001 and zero for 2002.
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the normal course of business, the Bank has outstanding
commitments and contingent liabilities, such as commitments to extend
credit and standby letters of credit, which are not included in the
accompanying consolidated financial statements. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount
of those instruments. The Bank uses the same credit policies in making
such commitments as it does for instruments that are included in the
balance sheet.
Financial instruments whose contract amount represents credit risk were
as follows (in thousands):
2002 2001
Commitments to extend credit $15,877 $12,134
Standby letters of credit 826 2,177
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 creditworthiness
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. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party,
Standby letters of credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend
credit.
48
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 CONCENTRATION OF CREDIT RISK:
The Bank has a concentration of credit risk in deposits and federal
funds sold to commercial banks as described in Note 3. Note 5 shows the
types of loans made by the Bank. A substantial portion of the Bank's
loans are secured by real estate. The Bank does not have any
significant concentrations to any one industry or customer.
NOTE 18 REGULATORY MATTERS:
New Peoples and the Bank are subject to various capital requirements
administered by its primary federal regulator, the Federal Reserve
Bank. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the New
Peoples' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the New
Peoples must meet specific capital guidelines that involve quantitative
measures of the New Peoples' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory
accounting practices. The New Peoples' capital amounts and
classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require New Peoples to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined) and of
Tier 1 capital (as defined) to average assets (as defined).
49
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 REGULATORY MATTERS (CONTINUED):
As of October 15, 2002, the most recent date of notification, the
Bureau of Financial Institutions categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following tables. There are no
conditions or events since the notification that management believes
have changed the Bank's category. The Bank's actual capital amounts (in
thousands) and ratios are presented in the table as of December 31,
2002 and 2001, respectively.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2002:
Total Capital to Risk
Weighted Assets: $ 25,564 12.11% $16,893 8% $21,116 10%
Tier 1 Capital to Risk
Weighted Assets: 23,339 11.05% 8,446 4% 12,670 6%
Tier 1 Capital to Average
Assets: 23,339 9.51% 11,372 4% 14,215 5%
December 31, 2001:
Total Capital to Risk
Weighted Assets: $ 20,684 12.03% $13,760 8% $17,200 10%
Tier 1 Capital to Risk
Weighted Assets: 18,891 10.99% 6,880 4% 10,320 6%
Tier 1 Capital to Average
Assets: 18,891 9.19% 8,226 4% 10,283 5%
50
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 (SFAS 107)
"Disclosures About the Fair Value of Financial Statements" defines the
fair value of a financial instrument as the amount at which a
financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced liquidation sale. As
the majority of the Bank's financial instruments lack an available
trading market, significant estimates, assumptions and present value
calculations are required to determine estimated fair value.
Estimated fair value and the carrying value of
financial instruments at December 31, 2002 and 2001, are as follows
(in thousands):
December 31, 2002 December 31, 2001
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- --------- ---------- ---------
Financial Assets
Cash and due from bank $ 8,815 $ 8,815 $ 8,160 $ 8,160
Federal funds sold 6,123 6,123 3,387 3,387
Investment securities 34,357 34,305 5,705 5,658
Federal Reserve Bank
stock 539 539 529 529
Loans 224,625 222,395 182,315 179,216
Accrued interest
receivable 1,846 1,846 1,638 1,638
Life insurance
investments 7,988 7,988 7,500 7,500
Financial Liabilities
Demand Deposits:
Non-interest bearing 22,379 22,379 15,798 15,798
Interest-bearing 9,711 9,711 7,535 7,535
Savings deposits 27,126 27,126 18,647 18,647
Time deposits 205,723 204,589 152,746 152,031
Accrued interest
payable 702 702 687 687
The carrying value of cash and due from banks, federal funds sold,
interest-bearing deposits, Federal Reserve Bank stock, deposits with
no stated maturities, and accrued interest approximates fair value.
The estimated fair value of investment securities was based on closing
market prices. The remaining financial instruments were valued based
on the present value of estimated future cash flows, discounted at
various rates in effect for similar instruments during the month of
December 2002 and 2001.
51
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
ASSETS
2002 2001
Due from banks $ 3,134,611 $
Investment in subsidiary 23,339,322 18,895,351
Other assets 20,142 3,472
---------- -----------
Total Assets $26,494,075 $ 18,898,823
========== ===========
LIABILITIES
Due to subsidiary bank $ 12,847 $ 7,749
---------- -----------
Total Liabilities $ 12,847 $ 7,749
---------- -----------
STOCKHOLDERS' EQUITY
Common stock - $ 2.00 par value, 12,000,000
shares authorized; 6,008,393 and 6,000,000
shares issued and outstanding for 2002
and 2001, respectively 12,016,786 12,000,000
Paid-in-Surplus 5,948,505 5,964,331
Stock subscriptions 5,410,900
Retained earnings 3,105,037 926,743
---------- -----------
Total Stockholders' Equity 26,481,228 18,891,074
---------- -----------
Total Liabilities and Stockholders' Equity $26,494,075 $ 18,898,823
========== ===========
52
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME
FOR ONE MONTH ENDED DECEMBER 31, 2001 AND
THE YEAR ENDED DECEMBER 31, 2002
2002 2001
Income
Dividends from subsidiary $ $ 25,000
Undistributed income from subsidiary 2,193,971 12,000
--------- ---------
Total Income 2,193,971 37,000
--------- ---------
Expenses
Legal fees (reorganization) 32,749
Shareholder related expenses 23,752
--------- ---------
Total Expenses 23,752 32,749
--------- ---------
Income before Income Taxes 2,170,219 4,251
Income Tax Benefit 8,076 3,472
--------- ---------
Net Income $2,178,295 $ 7,723
========= =========
53
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR ONE MONTH ENDED DECEMBER 31, 2001 AND
THE YEAR ENDED DECEMBER 31, 2002
Common Stock Retained
Stock Surplus Subscriptions Earnings Total
Balance
December 31, 2000 $ - $ - $ - $ - $ -
Exchange of New Peoples
Bankshares stock for
New Peoples Bank stock 12,000,000 5,964,331 919,019 18,883,350
Net Income 7,723 7,723
---------- --------- --------- -------- ----------
Balance
December 31, 2001 $12,000,000 $5,964,331 $ $ 926,742 $18,891,073
---------- --------- --------- -------- ----------
Stock options exercised 5,068 13,937 19,005
Common Stock Subscribed 5,469,490 5,469,490
Common Stock Issued 11,718 46,872 (58,590)
Cost of common stock
offering (76,635) (76,635)
Net Income 2,178,295 2,178,295
---------- ---------- ---------- --------- ----------
Balance
December 31, 2002 $12,016,786 $5,948,505 $5,410,900 $3,105,037 $26,481,228
========== ========= ========= ========= ==========
54
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
FOR ONE MONTH ENDED DECEMBER 31, 2001 AND
THE YEAR ENDED DECEMBER 31, 2002
2002 2001
Cash Flows From Operating Activities:
Net Income $2,178,295 $ 7,723
Adjustments to reconcile net income to
net cash used in operating activities:
Income of subsidiary bank (2,193,971) (12,000)
Net change in:
Other assets (16,670) (3,472)
Accounts payable 5,097 7,749
--------- ---------
Net Cash Used in Operating Activities (27,249)
--------- ---------
Cash Flows From Investing Activities:
Investment in subsidiary (2,250,000)
---------- ---------
Net Cash Used in Investing Activities (2,250,000)
---------- ---------
Cash Flows From Financing Activities:
Net proceeds from common stock offering 5,392,855
Exercise of stock options 19,005
--------- ---------
Net Cash Provided by Financing Activities 5,411,860
--------- ---------
Net Increase in Cash and Cash Equivalents 3,134,611
Cash and Cash Equivalents, Beginning of Year
--------- ---------
Cash and Cash Equivalents, End of Year $3,134,611 $ 0
========= =========
Supplemental Information:
Non-cash transactions:
Transfer of 3,000,000 shares of New Peoples
Bankshares stock for 3,000,000 shares of
New Peoples Bank stock 18,883,351
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
As reported on Form 8K on December 18, 2002, effective as of that date, New
Peoples Bankshares, Inc. (the "Corporation") or (the "Registrant") decided to
end the engagement of S. B. Hoover and Company, L.L.P. ("S. B. Hoover") as
the Corporation's independent certified public accountants by selecting Brown
Edwards & Company, L.L.P. to serve as its independent public accountants for
the year ended December 31, 2003. With the Audit Committee's recommendation,
the Board of Directors approved the selection on December 18, 2002. The
prior independent certified public accountants, S. B. Hoover has served as
the independent certified public accountants for the year ended December 31,
2002. Furthermore, they will continue to provide income tax preparation and
consulting services for the year ended December 31, 2003.
S. B. Hoover's report on the Corporation's consolidated financial statements
during the two most recent fiscal years contained no adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the last two fiscal years, there were no disagreements between the
Corporation and S. B. Hoover on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of S. B. Hoover, would have
caused it to make a reference to the subject matter of the disagreements in
connection with its report.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth information with respect to the directors and
executive officers of New Peoples Bankshares, Inc. With the exception of Tim
Ball, who started in 1999, all of the Directors have served as directors of the
Bank since 1998.
Principal Occupation
Directors Age During Past Five Years
Class I - Term Ending as of the 2003 Annual Meeting
Joe Carter 65 General Manager, Daugherty Chevrolet
Harold Lynne Keene 48 Owner/Operator, Keene Carpet, Inc.
John Maxfield 60 Retired
Fred Meade 68 Owner, Big M. Discount Stores
Virgil Sampson, Jr. 62 Owner, Scott Jewelers
Class II - Term Ending as of the 2004 Annual Meeting
Tim Ball 43 Self employed, Farmer
Michael G. McGlothlin 51 Attorney, McGlothlin & Wife
Bill Ed Sample 69 Self-employed Farmer
Paul Vencill, Jr. 61 Owner, Lebanon Equipment Co.
B. Scott White 57 Self Employed/Farmer
56
Class III - Term Ending as of the 2005 Annual Meeting
John D. Cox 46 Owner, Tri-County New Holland
Charles H. Gent 43 Self-employed, Logging/Farming
Frank Kilgore 50 Attorney, Kilgore & Kilgore
L. T. Phillips 84 Owner, Phillips TV & Appliance - deceased a/o
02-27-2002
Stephen H. Starnes 46 President, Starnes, Inc.
Executive Officers
Kenneth D. Hart 55 President and CEO
New Peoples Bank, Inc.
1998 to Present
Chief Administrative Officer
First Virginia Bank - Mountain Empire
1995 to 1998 (formerly Premier Bank
Central NA)
Chief Executive Officer
Peoples Bank, Inc.
1975 - 1995
Frank Sexton, Jr. 53 Executive Vice President and Cashier
New Peoples Bank, Inc.
June 1998 to Present
Senior Vice President & Cashier
First Virginia Bank - Mountain Empire
1991 - June 1998 (Formerly Premier
Bank Central, NA)
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's executive officers, directors and 10% shareholders, if any, are
required under Section 16(a) of the Securities Exchange Act of 1934 to file with
the Securities and Exchange Commission reports of their ownership and changes in
ownership of the Bank's securities. Based solely on a review of copies of such
reports furnished to the Company through the date hereof, or written
representations that no reports were required to be filed, the Company believes
that its executive officers and directors have filed on a timely basis all
reports required to be filed pursuant to Section 16(a) during the fiscal year
ended December 31, 2002.
57
Item 11. Executive Compensation
Summary
The following table sets forth a summary of certain information concerning the
compensation paid by the Company for services rendered in all capacities during
the years ended December 31, 2002, 2001 and 2000, to the President and
Chief Executive Officer of the Company. Only one executive officer of the Bank
had total compensation during the fiscal year which exceeded $100,000.
Summary Compensation Table
Annual Compensation (1)
Name and Year Salary Bonus Other Long-Term Compensation
Principal Position Securities Underlying Uptions
Kenneth D. Hart 2002 $125,000 6,250 -------
President and Chief 2001 $112,500 5,625 ------- 13,000
Executive Officer 2000 $100,000 4,792 -------
(1) Does not include certain perquisites and other personal benefits, the
amount of which are not shown because the aggregate amount of such
compensation during the year did not exceed the lesser of $50,000 or 10% of
total salary and bonus reported for such executive officer.
Salary Continuation Plan
On December 18, 2002, New Peoples entered into a salary continuation agreement
("Agreement") with Kenneth D. Hart. The Agreement provides for payments, at
normal retirement date, of $59,063 per year for fifteen years. In addition, the
Agreement provides benefits upon early termination (other than for cause),
death, disability or change in control.
The agreement is attached as Exhibit 10.2.
Stock Options
The following table sets forth for the year ended December 31, 2002, the grants
of stock options to the named executive officers.
Number Percent of Total
Of Securities Options Granted
Underlying to Employees Exercise or
Options in Fiscal Base
Name Granted(#)(1) Year(%)(2) Price($/Share) Expiration Date
Kenneth D. Hart 13,000 5.08% 7.50 December 31, 2011
(1) Stock options were granted at the market value of the shares of Common
Stock at the grant date. The grants are exercisable immediately after they
are granted. The total number of options held by Kenneth D. Hart is 20,500.
(2) Options to purchase 256,000 shares were granted to employees and 30,000
shares were granted to the directors during the year ended December 31,
2001.
(3) Options to purchase 51,500 shares were granted to employees and 28,000
shares were granted to the directors on January 01, 2003. Options to
purchase 7,500 shares were granted to Kenneth D. Hart.
58
Fiscal Year End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End (#) at Fiscal Year End ($) (1)
Name Exercisable Unexercisable Exercisable Unexercisable
Kenneth D. Hart 13,000 0 $32,500 0
(1) The value of in-the-money options at fiscal year end was calculated by
determining the difference between the latest trade price of a share of
Common Stock as reported to the Company in 2001 and the exercise price of
the options.
Compensation of Directors
During 2001, the Directors did not receive compensation for participating in
board and committee meetings.
During 2002, the Directors each received $100 monthly for attending board
meetings. During 2003, the monthly compensation will increase to $200.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 15, 2003, certain information with
respect to the beneficial ownership of the Company's common stock, par value
$2.00 per share ("Common Stock"), held by each director of the Company, the
executive officers' names in the Summary Compensation Table in "Item 11,
Executive Compensation" herein, and by the directors and all executive officers
as a group.
As of March 15, 2003, based on information available to the Bank, no person
beneficially owned 5% or more of the Company's common stock.
Amount and Nature of
Directors Beneficial Ownership (1)(2) Percent of Class
Tim Ball 6,400 *
P. O. Box 1356
Honaker, VA 24260
Joe Carter 13,220 *
RR4 Box 176
Clinchport, VA 24244
John D. Cox 37,000 *
13515 East Carters Valley Road
Gate City, VA 24251
Charles H. Gent 19,600 *
P. O. Box 330
Honaker, VA 24260
59
Harold Lynn Keene 29,000 *
P. O. Box 1320
Honaker, VA 24260
Frank Kilgore 63,700 *
P. O. Box 1210
St. Paul, VA 24283
John Maxfield 24,000 *
3270 Oak Circle Drive
Rosedale, VA 24280
Michael G. McGlothlin 74,000 *
P. O. Box 810
Grundy, VA 24614
Fred Meade 31,100 *
P. O. Box 10
St. Paul, VA 24283
L. T. Phillips 0 *
P. O. Box 457
St. Paul, VA 24283
Bill Ed Sample 24,400 *
Rt. 2 Box 361
Honaker, VA 24260
Earnest Virgil Sampson, Jr. 24,176 *
P. O. Box 504
Gate City, VA 24251
Stephen H. Starnes 23,330 *
P. O. Box 2078
Lebanon, VA 24266
Paul Vencill, Jr. 48,000 *
P. O. Box 129
Lebanon, VA 24266
B. Scott White 180,800 2.6%
Rt. 2 Bx 181-A
Castlewood, VA 24224
Executive
Officers
Kenneth D. Hart 71,000 1.0%
Frank Sexton, Jr. 35,632 *
60
All Directors and Executive
Officers as a Group 705,358 10.1%
-------------------
Less than 1% *
(1) For purposes of this table, beneficial ownership has been
determined in accordance with the provisions of Rule 13d-3 of the
Securities Exchange Act of 1934 under which, in general, a person is
deemed to be the beneficial owner of a security if he has or shares the
power to vote or direct the voting of the security or the power to
dispose of or direct the disposition of the security, or if he has the
right to acquire beneficial ownership of the security within sixty
days. Shares of Common Stock which are subject to stock options are
deemed to be outstanding for the purpose of computing the percentage of
outstanding Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Common Stock
owned by any other person or group.
(2) Included in the amounts of beneficial ownership above are stock
options that give the owners the right to acquire shares of stock with
60 days. Each director has 4,000 shares of unexercised options in the
totals above. Kenneth Hart and Frank Sexton, Jr. have 20,500 and 15,000
shares of unexercised options included in the totals above,
respectively.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2002, with respect
to compensation plans under which our shares of Common Stock are authorized for
issuance.
Number of Securities
Number of Securities Remaining Available
to be Issued Weighted Average for Future Issuance
upon Exercise of Exercise Price of Under Equity
Outstanding Options Outstanding Options Compensation Plans
Plan Category
Equity Compensation Plans
Approved by Board of Directors
2001 Stock Option
Plan 283,466 7.50 614,000
Item 13. Certain Relationships and Related Transactions
During 2002, the Bank extended credit to its directors. A schedule of related
party transactions is shown in Note 10 to the financial statements. All such
loans were made in the ordinary course of business and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions.
61
Item 14. 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
New Peoples Bankshares, Inc. (New Peoples) 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.
Under rules adopted by the Securities and Exchange Commission effective August
29, 2002, 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.
We have established our disclosure controls and procedures to ensure that
material information related to New Peoples 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 New Peoples and its
subsidiaries to identify any new transactions, events, trends, contingencies or
other matters that may be material to New Peoples' 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 January 31, 2003, a date within
90 days prior to the filing of this annual report. Based on this evaluation, New
Peoples' management, including the Chief Executive Officer and the Chief
Financial Officer, concluded that such disclosure controls and procedures were
operating effectively as designed as of the date of such evaluation.
Changes in Internal Controls
We also maintain a system of internal accounting controls that is designed to
provide assurance that assets are safeguarded and that transactions are executed
in accordance with management's authorization and properly recorded.
This system is continually reviewed and is augmented by written
policies and procedures, the 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 significantly affect those controls
subsequent to the date of the Company's evaluation.
62
Item 15. Exhibits and Reports on Form 8K
(a) Exhibits
The following exhibits are filed as part of this Form 10-K, and this list
includes the exhibit index:
No. Description
3.1 Articles of Incorporation of Registrant (1)
3.2 By Laws of Registrant (1)
10.1 Stock Option Plan (2)
10.2 Salary Continuation Plan for Kenneth D. Hart (filed herewith)
21 List of Subsidiaries (filed herewith)
99.1 Statement of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
(filed herewith)
99.2 Statement of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
(filed herewith)
(1) Incorporated by reference to Exhibits to Form 8K filed by
New Peoples Bankshares, Inc. on December 12, 2002
(2) Incorporated by reference to Exhibits to Form 10KSB filed by
New Peoples Bankshares, Inc. on March 31, 2001.
63
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused
this registration statement 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
Date: March 28, 2003
------------------
By: /s/ FRANK SEXTON, JR.
----------------------------------
Frank Sexton, Jr.
Chief Financial Officer
Date: March 28, 2003
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated.
Signature Capacity Date
/s/TIM BALL
Director March 28, 2003
----------------------------- --------------
Tim Ball
/s/JOE CARTER
Director March 28, 2003
----------------------------- --------------
Joe Carter
/s/JOHN D. COX
Director March 28, 2003
----------------------------- --------------
John D. Cox
/s/CHARLES H. GENT
Director March 28, 2003
----------------------------- --------------
Charles H. Gent
64
Signature Capacity Date
/s/HAROLD LYNN KEENE
Director March 28, 2003
----------------------------- --------------
Harold Lynn Keene
/s/FRANK KILGORE
Director March 28, 2003
----------------------------- --------------
Frank Kilgore
/s/JOHN MAXFIELD
Director March 28, 2003
----------------------------- --------------
John Maxfield
/s/MICHAEL G. MCGLOTHLIN
Director March 28, 2003
----------------------------- --------------
Michael G. McGlothlin
/s/FRED MEADE
Director March 28, 2003
----------------------------- --------------
Fred Meade
/s/BILL ED SAMPLE
Director March 28, 2003
----------------------------- --------------
Bill Ed Sample
/s/EARNEST VIRGIL SAMPSON, JR.
Director March 28, 2003
----------------------------- --------------
Earnest Virgil Sampson, Jr.
/s/STEPHEN H. STARNES
Director March 28, 2003
----------------------------- --------------
Stephen H. Starnes
/s/PAUL VENCILL, JR.
Director March 28, 2003
----------------------------- --------------
Paul Vencill, Jr.
/s/B. SCOTT WHITE
Director March 28, 2003
----------------------------- --------------
B. Scott White
65
CERTIFICATION
I, Kenneth D. Hart, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of New Peoples
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
66
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ KENNETH D. HART
-------------------------
Kenneth D. Hart
President and Chief Executive Officer
Date: March 28, 2003
------------------
65
CERTIFICATION
I, Frank Sexton, Jr., Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of New Peoples
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
66
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
By: /s/ FRANK SEXTON, JR.
-------------------------------
Frank Sexton, Jr.
Chief Financial Officer
Date: March 28, 2003
------------------