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United States
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, 2003
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
www.newpeoplesbank.com
(Internet website)
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 subject
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. [ ]
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 on the last business day
of the second quarter of 2003 was $68,980,030.
The number of shares outstanding of the registrant's common stock, was
6,904,569 as of March 18, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Corporation's Notice of Annual Meeting and Proxy Statement
for the Annual Meeting of May 26, 2004, are incorporated into Part III hereof.
LOCATION OF EXHIBIT INDEX The index of
exhibits is contained herein on page 48.
2
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
Item 9A. Controls and Procedures 48
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 48
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 48
SIGNATURES 50
3
PART I
Item 1. Business
General
New Peoples Bankshares, Inc. (New Peoples) is a financial holding company
operating under the laws of Virginia and is headquartered in Honaker,
Virginia. New Peoples wholly owns three subsidiaries: New Peoples Bank, Inc.,
(the Bank) a Virginia banking corporation; NPB Financial Services, Inc.,
(NPB Financial) an insurance and investment services corporation;
and NPB Web Services, Inc., (NPB Web) a web design and hosting company.
New Peoples Bank, Inc. offers 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.
The Bank is headquartered in Honaker, Virginia and operates 16 full service
offices and 2 loan production offices in the southwestern Virginia counties of
Russell, Scott, Washington, Tazewell, Buchanan, Dickenson, and Wise; Mercer
county in southern West Virginia and Sullivan county in eastern Tennessee. The
close proximity and mobile nature of individuals and businesses in adjoining
counties in Virginia, West Virginia, Tennessee and nearby cities places these
markets within our bank's targeted trade area, as well.
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 New
Peoples wholly owned 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.
In June 2003, New Peoples formed two new wholly owned subsidiaries, NPB
Financial Services, Inc. and NPB Web Services, Inc.
NPB Financial is a full-service insurance and investment firm, dealing in ally
types of personal and group life, health, and disability products, along with
mutual funds, fixed rate annuities, fee based asset management and other
investment products through a broker/dealer relationship with LINSCO/Private
Ledger.
NPB Web is an internet web site development and hosting company. It produces
custom designed web pages for use on the world wide web. Also, the company
serves as a web site host for customers and non-profit organizations. It also
develops the web sites of other subsidiaries and supplies advertising and
marketing expertise for New Peoples.
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 opened branch offices in Gate City, Clintwood, Big Stone
Gap, Tazewell and Davenport, Virginia. During 2003, we expanded into Grundy,
Dungannon, and Bristol, Virginia. We expanded into Tennessee and opened an
office in Bloomingdale, Tennessee in 2003, as well. We have loan production
offices located in Norton and Abingdon, Virginia. We anticipate a full service
branch location opening in Abingdon, Virginia in the second quarter of 2004.
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 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 adequate capital 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. In addition, investor relations information is
available on the internet site which includes Securities and Exchange Commission
regulatory filings.
Banking Services
General. We accept deposits, make 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, the 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.
Loans by type as a percentage of total loans are as follows:
December 31,
2003 2002 2001 2000 1999
------------------------------------------------
Commercial, financial and
agricultural 19.83% 19.32% 19.62% 22.84% 26.94%
Real estate - construction 2.46% 2.52% 2.15% 1.17% 2.64%
Real estate - mortgage 62.68% 58.93% 54.81% 54.05% 47.70%
Installment loans to
individuals 15.03% 19.23% 23.42% 21.94% 22.72%
-------- ------ ------ ------- -------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ======= ====== ====== ======
5
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 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,
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 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.
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, loan to value
limitations for residential, multi-family and non-residential properties are in
place. These are in addition to the usual credit analysis of borrowers.
Management feels that the loan-to-value ratios 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. Electronic banking services include debit cards,
internet banking, telephone banking, and wire transfers.
6
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 ("the Commission"). In the interim, we may contract for trust
services to our customers through outside vendors.
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 southwestern Virginia, southern West Virginia, and
eastern Tennessee 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. Many 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 costs
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, 2003,
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 - 34.02%, Scott County, VA - 28.06%,
Dickenson County, VA -22.66%, Tazewell County, VA -3.59%, Buchanan County, VA -
4.58%, Wise County, VA - 3.66%, and Mercer County, WV - 3.72%. Information for
the counties of Washington, VA and Sullivan, TN are not available since these
branches were not opened until after the second quarter of 2003.
Employees
As of December 31, 2003, we had 199 total employees, of which 194 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, the New Peoples is subject to regulation under the
Bank Holding Company Act of 1956, as amended, and the examination and reporting
requirements of the Board of Governors of the Federal Reserve System. As a
state-chartered commercial bank, the Bank is subject to regulation, supervision
and examination by the Virginia State Corporation Commission's Bureau of
Financial Institutions. It is also subject to regulation, supervision and
examination by the Federal Reserve Board. Other federal and state laws,
including various consumer and compliance laws, govern the activities of the
Bank, the investments that it makes and the aggregate amount of loans that it
may grant to one borrower.
The following description summarizes the significant federal and state laws
applicable to New Peoples and its subsidiaries. To the extent that statutory or
regulatory provisions are described, the description is qualified in its
entirety by reference to that particular statutory or regulatory provision
The Bank Holding Company Act
Under the Bank Holding Company Act, the New Peoples is subject to periodic
examination by the Federal Reserve and required to file periodic reports
regarding its operations and any additional information that the Federal Reserve
may require. Activities at the bank holding company level are limited to:
o banking, managing or controlling banks;
o furnishing services to or performing services for its subsidiaries;
and
o engaging in other activities that the Federal Reserve has
determined by regulation or order to be so closely related to
banking as to be a proper incident to these activities.
7
Some of the activities that the Federal Reserve Board has determined by
regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and specific types of leases, performing
specific data processing services and acting in some circumstances as a
fiduciary or investment or financial adviser.
With some limited exceptions, the Bank Holding Company Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or
control more than 5% of the voting shares of such bank (unless it
already owns or controls the majority of such shares); or
o merging or consolidating with another bank holding company.
In addition, and subject to some exceptions, the Bank Holding Company Act and
the Change in Bank Control Act, together with their regulations, require Federal
Reserve approval prior to any person or company acquiring "control" of a bank
holding company. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more, but less than 25%, of any class of voting securities and either has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
no other person owns a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenging this rebuttable control presumption.
In November 1999, Congress enacted the Gramm-Leach-Bliley Act, which made
substantial revisions to the statutory restrictions separating banking
activities from other financial activities. Under the GLBA, bank holding
companies that are well-capitalized and well-managed and meet other conditions
can elect to become "financial holding companies." As financial holding
companies, they and their subsidiaries are permitted to acquire or engage in
previously impermissible activities such as insurance underwriting, securities
underwriting and distribution, travel agency activities, insurance agency
activities, merchant banking and other activities that the Federal Reserve
determines to be financial in nature or complementary to these activities.
Financial holding companies continue to be subject to the overall oversight and
supervision of the Federal Reserve, but the GLBA applies the concept of
functional regulation to the activities conducted by subsidiaries. For example,
insurance activities would be subject to supervision and regulation by state
insurance authorities
Payment of Dividends
New Peoples is a legal entity separate and distinct from its banking and other
subsidiaries. The majority of New Peoples' revenues are from dividends paid to
the company by its subsidiaries. The Bank is subject to laws and regulations
that limit the amount of dividends it can pay. In addition, both New Peoples 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.
New Peoples does 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, 2003, the Bank did not declare any dividends to New Peoples.
The FDIC has the general authority to limit the dividends paid by insured banks
if the payment is deemed an unsafe and unsound practice. The FDIC has indicated
that paying dividends that deplete a bank's capital base to an inadequate level
would be an unsound and unsafe banking practice.
Insurance of Accounts, Assessments and Regulation by the FDIC
The deposits of the Bank are insured by the FDIC up to the limits set forth
under applicable law. The deposits of the Bank subsidiary are subject to the
deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment system under
which the assessment rate for an insured institution may vary according to
regulatory capital levels of the institution and other factors, including
supervisory evaluations. For example, depository institutions insured by the BIF
that are "well capitalized" and that present few or no supervisory concerns are
required to pay only the statutory minimum assessment of $2,000 annually for
deposit insurance, while all other banks are required to pay premiums ranging
from .03% to .27% of domestic deposits. These rate schedules are subject to
future adjustments by the FDIC. In addition, the FDIC has authority to impose
special assessments from time to time.
8
The FDIC is authorized to prohibit any BIF-insured institution from engaging in
any activity that the FDIC determines by regulation or order to pose a serious
threat to the respective insurance fund. Also, the FDIC may initiate enforcement
actions against banks, after first giving the institution's primary regulatory
authority an opportunity to take such action. The FDIC may terminate the deposit
insurance of any depository institution if it determines, after a hearing, that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period from six months to two years, as determined
by the FDIC. New Peoples is not aware of any existing circumstances that could
result in termination of any of the Bank's deposit insurance.
Capital Requirements
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, the Company 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 "Tier 1 Capital", which
is defined as common equity, retained earnings and qualifying perpetual
preferred stock, less certain intangibles. The remainder may consist of "Tier 2
Capital", which is defined as specific subordinated debt, some hybrid capital
instruments and other qualifying preferred stock and a limited amount of the
loan loss allowance. In addition, each of the federal banking regulatory
agencies has established minimum leverage capital requirements for banking
organizations. Under 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 bank regulatory evaluation of an organization's
overall safety and soundness. In sum, the capital measures used by the federal
banking regulators are:
o the Total Capital ratio, which is the total of Tier 1 Capital and
Tier 2 Capital;
o the Tier 1 Capital ratio; and
o the leverage ratio.
Under these regulations, a bank will be:
o "well capitalized" if it has a Total Capital ratio of 10% or
greater, a Tier 1 Capital ratio of 6% or greater, and is not
subject to any written agreement, order, capital directive, or
prompt corrective action directive by a federal bank regulatory
agency to meet and maintain a specific capital level for any
capital measure;
o "adequately capitalized" if it has a Total Capital ratio of 8% or
greater, a Tier 1 Capital ratio of 4% or greater, and a leverage
ratio of 4% or greater - or 3% in certain circumstances - and is
not well capitalized;
o "undercapitalized" if it has a Total Capital ratio of less than
8% or greater, a Tier 1 Capital ratio of less than 4% - or 3% in
certain circumstances;
o "significantly undercapitalized" if it has a Total Capital ratio
of less than 6%, a Tier 1 Capital ratio of less than 3%, or a
leverage ratio of less than 3%; or
o "critically undercapitalized" if its tangible equity is equal to
or less than 2% of average quarterly tangible assets.
The risk-based capital 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.
The FDIC may take various corrective actions against any undercapitalized bank
and any bank that fails to submit an acceptable capital restoration plan or
fails to implement a plan accepted by the FDIC. These powers include, but are
not limited to, requiring the institution to be recapitalized, prohibiting asset
growth, restricting interest rates paid, requiring prior approval of capital
distributions by any bank holding company that controls the institution,
requiring divestiture by the institution of its subsidiaries or by the holding
company of the institution itself, requiring new election of directors, and
requiring the dismissal of directors and officers. The Bank presently maintains
sufficient capital to remain in compliance with these capital requirements.
9
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 FDIC insurance funds in
the event that the depository institution is insolvent or is in danger of
becoming insolvent. For example, under the 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.
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 is 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.
Monetary Policy
The commercial banking business is affected not only by general economic
conditions but also by the monetary policies of the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in United States government securities, changes in the
discount rate on member bank borrowing and changes in reserve requirements
against deposits held by all federally insured banks. The Federal Reserve
Board's monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and international economy
and in the money markets, as well as the effect of actions by monetary fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of the Bank.
Federal Reserve System
In 1980, Congress enacted legislation that imposed reserve requirements on all
depository institutions that maintain transaction accounts or nonpersonal time
deposits. NOW accounts, money market deposit accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to these reserve
requirements, as are any nonpersonal time deposits at an institution.
These percentages are subject to adjustment by the Federal Reserve Board.
Because required reserves must be maintained in the form of vault cash or in a
non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the
effect of the reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Transactions with Affiliates
Transactions between banks and their affiliates are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity
that controls, is controlled by or is under common control with such bank.
Generally, Sections 23A and 23B (i) limit the extent to which the Bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and
maintain an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital stock and surplus, and (ii) require that all
such transactions be on terms substantially the same, or at least as favorable,
to the association or subsidiary as those provided to a nonaffiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions.
10
Loans to Insiders
The Federal Reserve Act and related regulations impose specific restrictions on
loans to directors, executive officers and principal shareholders of banks.
Under Section 22(h) of the Federal Reserve Act, loans to a director, an
executive officer and to a principal shareholder of a bank, and some affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the bank's loan-to-one
borrower limit. Loans in the aggregate to insiders and their related interests
as a class may not exceed two times the bank's unimpaired capital and unimpaired
surplus until the bank's total assets equal or exceed $100 million, at which
time the aggregate is limited to the bank's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and
principal shareholders of a bank or bank holding company, and their respective
affiliates, unless such loan is approved in advance by a majority of the board
of directors of the bank with any "interested" director not participating in the
voting. The FDIC has prescribed the loan amount, which includes all other
outstanding loans to such person, as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500 thousand). Section 22(h) requires that loans to directors,
executive officers and principal shareholders be made on terms and underwriting
standards substantially the same as offered in comparable transactions to other
persons.
Community Reinvestment Act
Under the Community Reinvestment Act and related regulations, depository
institutions have an affirmative obligation to assist in meeting the credit
needs of their market areas, including low and moderate-income areas, consistent
with safe and sound banking practice. The Community Reinvestment Act requires
the adoption by each institution of a Community Reinvestment Act statement for
each of its market areas describing the depository institution's efforts to
assist in its community's credit needs. Depository institutions are periodically
examined for compliance with the Community Reinvestment Act and are periodically
assigned ratings in this regard. Banking regulators consider a depository
institution's Community Reinvestment Act rating when reviewing applications to
establish new branches, undertake new lines of business, and/or acquire part or
all of another depository institution. An unsatisfactory rating can
significantly delay or even prohibit regulatory approval of a proposed
transaction by a bank holding company or its depository institution
subsidiaries.
The Gramm-Leach-Bliley Act and federal bank regulators have made various changes
to the Community Reinvestment Act. Among other changes, Community Reinvestment
Act agreements with private parties must be disclosed and annual reports must be
made to a bank's primary federal regulator. A bank holding company will not be
permitted to become a financial holding company and no new activities authorized
under the GLBA may be commenced by a holding company or by a bank financial
subsidiary if any of its bank subsidiaries received less than a "satisfactory"
rating in its latest Community Reinvestment Act examination.
Fair Lending; Consumer Laws
In addition to the Community Reinvestment Act, other federal and state laws
regulate various lending and consumer aspects of the banking business.
Governmental agencies, including the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice, have
become concerned that prospective borrowers experience discrimination in their
efforts to obtain loans from depository and other lending institutions. These
agencies have brought litigation against depository institutions alleging
discrimination against borrowers. Many of these suits have been settled, in some
cases for material sums, short of a full trial.
Recently, these governmental agencies have clarified what they consider to be
lending discrimination and have specified various factors that they will use to
determine the existence of lending discrimination under the Equal Credit
Opportunity Act and the Fair Housing Act, including evidence that a lender
discriminated on a prohibited basis, evidence that a lender treated applicants
differently based on prohibited factors in the absence of evidence that the
treatment was the result of prejudice or a conscious intention to discriminate,
and evidence that a lender applied an otherwise neutral non-discriminatory
policy uniformly to all applicants, but the practice had a discriminatory
effect, unless the practice could be justified as a business necessity .
Banks and other depository institutions also are subject to numerous
consumer-oriented laws and regulations. These laws, which include the Truth in
Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures
Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and
the Fair Housing Act, require compliance by depository institutions with various
disclosure requirements and requirements regulating the availability of funds
after deposit or the making of some loans to customers.
11
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 was signed into law on November 12, 1999. The
GLBA 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 its provisions require the federal bank regulatory
agencies and other regulatory bodies to adopt implementing regulations, and for
that reason an assessment of the full impact of the GLBA on the Company must
await completion of that regulatory process. The following description
summarizes some of its significant provisions.
The GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting
unrestricted affiliations between banks and securities firms. It 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, investment, merchant banking, 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 GLBA 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 specific
areas identified under the law. Under the new law, the federal bank regulatory
agencies adopted insurance consumer protection regulations that apply to sales
practices, solicitations, advertising and disclosures.
The GLBA adopts a system of functional regulation under which the Federal
Reserve Board is designated as the umbrella regulator for financial holding
companies, but financial holding company affiliates are 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. It repeals the broad exemption of
banks from the definitions of "broker" and "dealer" for purposes of the
Securities Exchange Act of 1934, as amended. It also 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."
Additionally, the new law 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 GLBA contains extensive customer privacy protection provisions. Under these
provisions, a financial institution must provide to its customers, both at the
inception of the customer relationship and on an annual basis, the institution's
policies and procedures regarding the handling of customers' nonpublic personal
financial information. The new law provides that, except for specific 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 GLBA also
provides that the states may adopt customer privacy protections that are
stricter than those contained in the act.
Future Regulatory Uncertainty
Because federal regulation of financial institutions changes regularly and is
the subject of constant legislative debate, the New Peoples cannot forecast how
federal regulation of financial institutions may change in the future and impact
its operations. Although Congress in recent years has sought to reduce the
regulatory burden on financial institutions with respect to the approval of
specific transactions, New Peoples fully expects that the financial institution
industry will remain heavily regulated in the near future and that additional
laws or regulations may be adopted further regulating specific banking
practices.
Item 2. Properties
At December 31, 2003, the Corporation's net investment in premises and equipment
in service was $14.3 million. Our main office is located at 2 Gent Drive in
Honaker, Virginia. The building contains a full service branch, administration,
and operations. Due to the expansive growth over the past five years there is
not adequate room to support all of the bank operations. A new operations center
is under construction at the Honaker location and is anticipated to be complete
in the second quarter of 2004.
12
The Bank owns 14 of its 16 full service branches. The owned properties in
Virginia are located in Big Stone Gap, Castlewood, Clintwood, Davenport, Gate
City, Grundy, Haysi, Honaker, Lebanon, Pounding Mill, Tazewell, and Weber City.
Offices in Princeton, West Virginia and Bloomingdale, Tennessee are also owned
by the Bank.
The Bank has 4 operating lease arrangements with varying lengths terms. Of these
4, 2 are full service branches in Bristol and Dungannon, Virginia. The other two
additional leased offices are located in Abingdon and Norton, Virginia and are
used for loan production and NPB Financial Services.
A new branch is under construction in Abingdon which will be a full service
location for the Bank and NPB Financial. It will be owned and is anticipated to
open in the second quarter of 2004.
We believe that all of our properties are maintained in good operating condition
and are suitable and adequate for our operational needs.
We will continue to investigate and consider other possible sites that would
enable us to profitably serve our chosen market area. Purchases of premises and
equipment for the year 2004 will depend on the decision to open additional
branches.
Item 3. Legal Proceedings
In the course of operations, we may become a party to legal proceedings. We are
not aware of any material pending or threatened legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The following is the result of voting on proposals presented at the New Peoples
Bankshares, Inc. Annual Meeting of Shareholders held October 16, 2003. The
following proposal was voted on:
The election of the following individuals named in the proxy statement and
nominated by the Board of Directors for election as directors of New Peoples
Bankshares, Inc. for terms of three years each expiring at the 2006 Annual
Meeting of Shareholders.
FOR WITHHELD
Joe M. Carter 3,564,565 4,778
Harold Lynn Keene 3,564,565 4,778
John D. Maxfield 3,564,565 4,778
Fred W. Meade 3,564,565 4,778
E. Virgil Sampson, Jr. 3,564,565 4,778
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 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. Other transactions may have occurred at prices about
which we are not aware.
2003 2002
High Low High Low
1st quarter $ 10.00 $10.00 $ 10.00 $10.00
2nd quarter 10.00 9.00 10.00 10.00
3rd quarter 10.00 10.00 11.00 11.00
4th quarter 11.00 10.00 10.00 10.00
The most recent sales price of which management is aware was $13.00 per share
during the first quarter of 2004.
(b) Holders
On March 18, 2004, there were approximately 4,612 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 in order to promote growth and the ability to compete in our market
area. As a result, we do not anticipate paying a dividend on our Common Stock in
2004. See Note 15 and Note 19 for further discussion of dividend limitations and
capital requirements.
13
Item 6. Selected Financial Data
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 ended December 31,
2003, 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.
For the Years Ended December 31,
(Dollars in thousands, except
per share data) 2003 2002 2001 2000 1999
Income Statement Data
Gross interest income $ 19,956 $ 17,040 $ 15,267 $ 11,228 $ 5,454
Gross interest expense 6,332 6,375 7,950 6,325 2,943
Net interest income 13,624 10,665 7,317 4,903 2,511
Provision for possible
loan losses 364 603 571 513 867
Net interest income after
provision for loan losses 13,260 10,062 6,746 4,390 1,644
Non-interest income 1,802 1,412 753 444 243
Non-interest expense 10,801 8,218 5,933 3,683 2,644
Income (loss) before income
taxes 4,261 3,256 1,565 1,151 (757)
Income tax expense (benefit) 1,447 1,078 556 389 (433)
Net income (loss) 2,814 2,178 1,009 762 (324)
Per Share Data and Shares
Outstanding (1)
Net income, basic 0.41 0.36 0.17 0.14 (0.14)
Net income, diluted 0.41 0.35 0.17 0.14 (0.14)
Cash dividends - - - - -
Book value at end of period 4.75 4.04 3.15 2.98 2.32
Tangible book value at period
end 4.75 4.04 3.15 2.98 2.32
Weighted average shares
outstanding, basic (1) 6,876 6,105 6,000 5,400 2,300
Weighted average shares
outstanding, diluted (1) 6,937 6,168 6,000 5,400 2,300
Shares outstanding at period
end (1) 6,903 6,008 6,000 6,000 2,400
Shares subscribed at period
end - 541 - - -
Period-End Balance Sheet Data
Total assets 342,508 291,398 214,253 157,390 99,081
Total loans 295,438 222,394 179,216 131,086 86,560
Total allowance for loan
losses (2,432) (2,224) (1,793) (1,311) (865)
Total deposits 308,221 263,805 194,011 138,447 87,490
Shareholders' equity 32,805 26,481 18,891 17,882 11,121
Performance Ratios
Return on average assets 0.86% 0.89% 0.54% 0.58% -0.45%
Return on average shareholders'
equity 9.46% 10.80% 5.48% 5.26% -3.11%
Average shareholders' equity
to average assets 9.09% 8.22% 9.91% 11.10% 14.38%
Net interest margin (2) 4.58% 4.87% 4.31% 3.99% 3.78%
Asset Quality Ratios
Net charge-offs to average
loans 0.06% 0.08% 0.06% 0.06% 0.06%
Allowance to period-end
gross loans 0.82% 1.00% 1.00% 1.00% 1.00%
Nonperforming assets to
gross loans 0.19% 0.34% 0.04% 0.07% 0.09%
Capital and Liquidity Ratios
Risk-based:
Tier 1 capital 12.20% 12.54% 10.99% 15.24% 13.60%
Total capital 13.10% 13.59% 12.03% 16.36% 14.70%
Leverage capital ratio 9.29% 9.31% 9.19% 11.73% 11.45%
Total equity to total assets 9.58% 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.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Caution About Forward Looking Statements
We make forward looking statements in this annual report that are subject to
risks and uncertainties. These forward looking statements include statements
regarding our profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, growth strategy, and financial and other goals. The
words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by factors including the following:
the ability to successfully manage our growth or implement our growth strategies
if we are unable to identify attractive markets, locations or opportunities to
expand in the future; maintaining capital levels adequate to support our growth;
maintaining cost controls and asset qualities as we open or acquire new
branches; reliance on our management team, including our ability to attract and
retain key personnel; the successful management of interest rate risk; changes
in general economic and business conditions in our market area; changes in
interest rates and interest rate policies; risks inherent in making loans such
as repayment risks and fluctuating collateral values; competition with other
banks and financial institutions, and companies outside of the banking industry,
including those companies that have substantially greater access to capital and
other resources; demand, development and acceptance of new products and
services; problems with technology utilized by us; changing trends in customer
profiles and behavior; and changes in banking and other laws and regulations
applicable to us.
Because of these uncertainties, our actual future results may be materially
different from the results indicated by these forward looking statements. In
addition, our past results of operations do not necessarily indicate our future
results.
General
The following commentary discusses major components of our business and presents
an overview of our consolidated financial position at December 31, 2003 and 2002
as well as results of operations for the years ended December 31, 2003, 2002 and
2001. 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.
New Peoples generates a significant amount of its income from the net interest
income earned by the Bank. Net interest income is the difference between
interest income and interest expense and the quality of the assets. Interest
income depends on the amount of interest-earning assets outstanding during the
period and the interest rates earned thereon. The Bank's cost of money is a
function of the average amount of deposits and borrowed money outstanding during
the period and the interest rates paid thereon. The quality of the assets
further influences the amount of interest income lost on nonaccrual loans and
the amount of additions to the allowance for loan losses. The Bank also
generates noninterest income from service charges on deposit accounts and
commissions on insurance products sold.
Overview
Growth continued to be the theme for the year 2003 as New Peoples experienced
growth in total assets, loans, deposits, capital, net income, branches and
services.
At December 31, 2003, total assets were $342.5 million, an increase of $51.1
million, or 17.54%, over 2002. Total deposits grew $44.4 million, or 16.83%, to
$308.2 million, and total loans were $295.4 million, an increase of $73.0
million, or 32.84%.
During the first quarter of 2003, we successfully closed on the stock offering
that began during the fourth quarter of 2002. We raised additional capital of
$8.8 million, net of associated costs of $79 thousand. Total capital was $32.8
million at the end of 2003 as compared to total capital of $26.5 million at the
end of 2002.
15
Our net income for the year ended December 31, 2003 was $2.8 million, as
compared to net income of $2.2 million, an increase of $636 thousand, or 29.20%
over the previous year. Net income per share was $.41 for the year ended
December 31, 2003, as compared to $.36 and $.17 for 2002 and 2001, respectively.
This increase is due to the increased production at the branches and to a
decrease in the provision for loan losses. The provision for loan losses
decreased to $364 thousand from $603 thousand as was deemed appropriate by the
evaluation of the quality of the loan portfolio by management. The return on
average assets was .86%, .89% and .54% for the periods ending December 31, 2003,
2002 and 2001, respectively. The return on average equity was 9.46%, 10.80% and
5.48% for the same periods ending December 31, 2003, 2002 and 2001,
respectively.
During 2003, New Peoples continued expanding its branch network by adding
offices in Grundy, Dungannon and Bristol, Virginia. In addition, we expanded our
franchise into eastern Tennessee with an office in Bloomingdale, Tennessee. We
anticipate each new office to contribute to the growth of New Peoples. We will
be opening a new branch in Abingdon, Virginia during the second quarter of 2004.
The Bank currently has 18 locations throughout southwestern Virginia, southern
West Virginia, and eastern Tennessee.
New services are now available for our customers with the addition of the two
new subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc. With
these two new companies, we can sell insurance, investments and provide internet
web services to our customers. These new additions to the services we offer will
continue to allow us to provide personal and customized financial services to
individuals, small to medium size businesses and the professional community. Our
focus still remains on being a community bank that serves the banking needs of
our customers by developing personal, hometown relationships.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and
estimates used in the preparation of our financial statements. Our most critical
accounting policy relates to our provision for loan losses, which reflects the
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our borrowers were to deteriorate,
resulting in an impairment of their ability to make payments, our estimates
would be updated, and additional provisions could be required. For further
discussion of the estimates used in determining the allowance for loan losses,
we refer you to the section on "Provision for Loan Losses" in this discussion.
Net Interest Income and Net Interest Margin
Our main source of income is our net interest margin, or the difference between
interest income earned on earning assets and interest expenses on interest
bearing liabilities. The net interest margin best indicates how effective we
have been in deploying assets and liabilities and pricing strategies.
Our net interest income, which equals total interest and dividend income less
total interest expense, increased from $10.7 million for 2002 to $13.6 million
for 2003. The increase is related to the increase in loan volume during the
year. Loan income increased to $19.4 million for 2003 from $16.7 million for
2002, which is an increase of $2.7 million, or 16.35%. In addition, despite a
$33.5 million, or 13.88% annual increase in total interest bearing deposits, we
were able to control the costs on these funds. Total interest expense slightly
decreased $43 thousand to $6.3 million.
The net interest margin, which equals net interest income divided by total
interest earning assets, in 2003 was 4.58%, compared to 4.87% for 2002. This is
a decrease of 29 basis points. During 2003, we experienced large deposit growth
in a short period of time as a result of new branches. This growth outpaced loan
growth for a period of time. As a result, the funds were invested in lower
yielding assets such as investments and federal funds sold; thus, the result was
a lower yield on earning assets of 6.71% for 2003 versus 7.78% for 2002. During
the fourth quarter, we experienced some deposit runoff and short term deposits
re-priced at lower interest rates. In addition, loan volume increased
significantly which has reduced the amount of funds invested in lower yielding
assets. Even though we have a strong net interest margin at 4.58%, we anticipate
it to increase during 2004 if economic conditions continue to improve and loan
growth remains strong.
From 2001 to 2002, the net interest income increased from $7.3 million for 2001
to $10.7 million for 2002. Two major contributors to the increase were an
increase in loans, a higher yielding asset, and a significant decrease in the
cost of funds from 5.18% in 2001 to 3.14% for 2002, or 204 basis points. As new
deposits were added at lower market interest rates and existing deposits
re-priced at much lower rates than originated, we were able to decrease interest
expense during the period 2002 by $1.6 million, or 19.81%. The result was an
increase in the net interest margin from 4.31% for 2001 to 4.87% for 2002.
16
The following table shows the rates paid on earning assets and deposit
liabilities for the periods indicated.
Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates
(In Thousands of Dollars)
For the Year Ended For the Year Ended For the Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
ASSETS
Loans including fees $ 254,153 $ 19,402 7.63% $ 201,417 $ 16,675 8.28% $ 155,891 $ 14,602 9.37%
Federal Funds sold 16,538 172 1.04% 12,501 200 1.60% 9,514 395 4.15%
Other investments 26,695 382 1.43% 5,224 165 3.16% 4,388 270 6.15%
Total Earning Assets 297,386 19,956 6.71% 219,142 17,040 7.78% 169,793 15,267 8.99%
Less: Allowance for
loans losses (2,503) (2,003) (1,573)
Non-earning assets 32,194 28,389 17,649
-------- --------- ---------
Total Assets $ 327,077 $ 245,528 $ 185,869
======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits
Demand - Interest
bearing $ 14,224 110 0.77% $ 13,253 107 0.81% $ 5,945 $ 120 2.02%
Savings 34,670 441 1.27% 18,862 451 2.39% 12,912 379 2.94%
Time deposits 215,734 5,770 2.67% 170,999 5,817 3.40% 134,502 7,451 5.54%
Other borrowings 730 11 1.51% - - - - - -
-------- ----- ---- -------- ----- ----- ------- ------ ------
Total interest bearing
liabilities 265,358 6,332 2.39% 203,114 6,375 3.14% 153,359 7,950 5.18%
-------- ----- ---- --------- ----- ----- ------- ------ ----
Non-interest bearing
deposits 30,473 20,901 12,886
Other liabilities 1,501 1,340 1,197
-------- ------ --------
Total Liabilities 297,332 225,355 167,442
Stockholder's Equity 29,745 20,173 18,427
-------- ------- -------
Total Liabilities and
Stockholder's Equity $ 327,077 $ 245,528 $ 185,869
======== ======== ========
Net Interest Income $ 13,624 $ 10,665 $ 7,317
======== ========== ========
Net Yield on Interest Earning Assets 4.58% 4.87% 4.31%
===== ===== ======
Net Interest Spread 4.32% 4.64% 3.81%
==== ==== ====
(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.
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.
17
Volume and Rate Analysis
(In thousands)
2003 Compared to 2002 2002 Compared to 2001
--------------------------------- ------------------------------------
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 $ 4,366 $ (1,639) $ 2,727 $ 4,264 $ (2,191) $ 2,073
Federal funds sold 65 (93) (28) 124 (319) (195)
Other investments 678 (461) 217 51 (156) (105)
Total Earning Assets 5,109 (2,193) 2,916 4,439 (2,666) 1,773
Interest Bearing Liabilities:
Demand 8 (5) 3 148 (161) (13)
Savings 378 (388) (10) 175 (103) 72
All other time deposits 1,522 (1,569) (47) 2,022 (3,656) (1,634)
Other borrowed funds - - 11 - - -
Total Interest Bearing
Liabilities 1,908 (1,962) (43) 2,345 (3,920) (1,575)
Change in Net Interest
Income $ 3,201 $ (231) $ 2,959 $ 2,094 $ 1,254 $ 3,348
Loans
Our primary source of income comes from interest earned on loans receivable. We
have continued to have strong loan demand as evidenced by annual increases of
$73.0 million, $43.1 million, and $43.4 million for the years 2003, 2002 and
2001, respectively. A schedule of loans by type is set forth immediately below.
Approximately 65.14% of the loan portfolio is secured by real estate at the end
of 2003.
Loans receivable outstanding are summarized as follows:
Loan Portfolio
December 31,
(Dollars are in thousands) 2003 2002 2001 2000 1999
-------------------------------------------
Commercial, financial and
agricultural $58,593 $42,959 $35,168 $29,941 $23,321
Real estate - construction 7,258 5,615 3,845 1,528 2,285
Real estate - mortgage 185,191 131,050 98,229 70,858 41,288
Installment loans to
individuals 44,396 42,770 41,974 28,759 19,666
------ ------ ------ ------ -------
Total $295,438 $222,394 $179,216 $131,086 $86,560
======= ======= ======= ======= ======
Our loan maturities as of December 31, 2003 are shown in the following table.
Maturities of Loans
Less than One to Five After Five
(Dollars are in thousands) One Year ears Years Total
-------- -------- --------- ------
Commercial and agriculture $ 25,552 $ 22,482 $ 10,559 $ 58,593
Real estate 53,475 34,977 103,997 192,449
Consumer- installment/ other 9,498 32,153 2,745 44,396
Total $ 88,525 $ 89,612 $117,301 $295,438
Loans with fixed rates $ 26,463 $ 73,058 $112,234 $211,755
Loans with variable rates 62,062 16,554 5,067 83,683
Total $ 88,525 $ 89,612 $117,301 $295,438
This table reflects the earlier of the maturity or re-pricing dates for various
assets and liabilities at December 31, 2003. In preparing this table, no
assumptions are made with respect to loan prepayments. Loan principal payments
are included in the earliest period in which the loan matures or can be
re-priced. Principal payments on installment loans scheduled prior to maturity
are included in the period of maturity or re-pricing.
18
Provision for Loan Losses
The provision for loan losses was $364 thousand for 2003 compared with $603
thousand for 2002. The allowance for loan losses was $2.4 million at December
31, 2003. The ratio of the allowance for loan losses to total loans was .82% at
the end of 2003 as compared to 1.00% at the end of 2002. Net loans charged off
for 2003 were $156 thousand, or .06% of average loans, compared to $172 thousand
for 2002, or .08% of average loans.
The provision for loan losses was $571 thousand for 2001 as compared with $603
thousand for 2002. The allowance for loan losses at the end of each year was
approximately 1.00% of total loans. Net loans charged off for 2001 were $89
thousand, or .06% of average loans, and $172 thousand, or .08% of average loans
at the end of 2002.
The calculation of the allowance for loan losses is considered a critical
accounting policy. The adequacy of the allowance for loan losses is based upon
management's judgment and analysis. The following factors are evaluated in
determining the adequacy of the allowance: risk characteristics of the loan
portfolio, current and historical loss experience, concentrations and internal
and external factors such as general economic conditions.
Certain risk factors exist in the Bank's loan portfolio. Since the Bank began in
1998, we have experienced significant loan growth each year. Although we have
experienced lenders who are familiar with their customer base, some of the loans
are too new to have exhibited signs of weakness. In addition, recent expansions
into new markets increase credit risk. We consider these factors to be the
primary higher risk characteristics of the loan portfolio.
Loans delinquent greater than 90 days still accruing interest and loans in
non-accrual status present a higher risk factor. As of December 31, 2003, there
were 12 loans in non-accrual status totaling $539 thousand, or 0.18% of total
loans. The amount of interest that would have been recognized on these loans in
the year 2003 was $47 thousand. There were 2 loans greater than 90 days past due
and still accruing interest totaling $26 thousand, or 0.01% of total loans. It
is our policy to stop accruing interest on a loan, and classify that loan as
non-accrual under the following circumstances: (a) whenever we are advised by
the borrower that scheduled payment or interest payments cannot be met, (b) when
our best judgment indicates that payment in full of principal and interest can
no longer be expected, or (c) when any such loan or obligation becomes
delinquent for 90 days unless it is both well secured and in the process of
collection. Non-accrual loans did not have a significant impact on interest
income in any of the periods presented. No loans are classified as troubled debt
restructurings as defined by Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings." There are also no loans
identified as "potential problem loans." We do not have any commitments to lend
additional funds to non-performing debtors. Following is a summary of
non-accrual and past due loans greater than 90 days still accruing interest:
Non-Accrual and Past Due Loans
(Dollars in thousands)
December 31,
2003 2002 2001 2000 1999
Non-accruing loans $ 539 $ 761 $ 47 $ 73 $ -
Loans past due 90 days or
more and
still accruing 26 - 29 23 77
----- ----- ----- ----- -----
Total $ 565 $ 761 $ 76 $ 96 $ 77
===== ===== ===== ===== =====
Percent of total loans 0.19% 0.34% 0.04% 0.07% 0.09%
======= ======= ====== ====== =====
Loss experience in the loan portfolio has been minimal. Net loans charged-off
over the five year period have not exceeded .08% of average loans in a
particular year. In addition, non-performing assets as a percentage of total
loans has not exceeded .34%. The trend has been consistent through the current
year. We view these as positive indicators of the quality of those loans
originated in the early years of the Bank.
A majority of the loans are collateralized by real estate located in our market
area. Market values have been and remain stable. It is our policy to
sufficiently collateralize loans to minimize loss exposures in case of default.
The market area is somewhat diverse, but in certain areas more reliant upon
agriculture and coal mining. As a result, increased risk of loan impairments is
possible if these industries experience a significant downturn. However, we do
not foresee this happening in the near future.
19
All internal and external factors are considered in the determination of the
adequacy of the allowance for loan losses. The methodology used to calculate the
allowance provides sufficiently for potential losses present at the end of the
period. The evaluation of individual loan credits is performed by the internal
credit review department. Loans are initially risk rated by the originating loan
officer. If deteriorations in the financial condition of the borrower and the
capacity to repay the debt occur, along with other factors, the loan may be
downgraded. This is typically determined by either the loan officer or credit
review personnel. Guidance for the evaluation is established by the regulatory
authorities who periodically review the results for compliance. The
classifications used by the Bank are superior, average, pass, other assets
especially mentioned, substandard, doubtful and loss.
Our policy has been to keep the allowance for loan losses at a minimum of 1.00%
of total loans or an amount calculated by multiplying a loss factor times each
risk classification pool. This was due to the fact that we had no historical
loss trends as a de novo financial institution. This methodology is consistent
with the guidelines traditionally used by bank regulatory agencies.
However, during the fourth quarter of 2003, we changed our methodology for
calculating the allowance for loan losses. This change in methodology has been
approved by the Board of Directors. Due to the risk factors previously
mentioned, all loans classified as other assets especially mentioned,
substandard, doubtful and loss are individually reviewed for impairment. An
evaluation is made to determine if the collateral is sufficient for each of
these credits. If an exposure exists, a specific allowance is directly made for
the amount of the potential loss, which totaled $95 thousand on December 31,
2003, or 3.91% of the allowance for loan loss. In addition, for these credits
adequately secured by collateral, a general allocation is made to allow for any
inherent risks. We calculate an allowance for the remaining loan portfolio based
upon an estimated loan loss percentage. The evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as more
information becomes available. As economic conditions and performance of our
loans change, it is possible that future increases may be needed to the
allowance for loan losses. 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)
For the Years Ended December 31,
Activity 2003 2002 2001 2000 1999
Beginning Balance $2,224 $1,793 $1,311 $ 865 $ -
----- ----- ----- ----- -----
Provision charged to expense 364 603 571 513 867
----- ---- ------ ----- -----
Loan Losses:
Installment loans to
individuals (180) (207) (98) (70) (2)
Commercial loans (7) - -
Recoveries:
Installment loans to
individuals 31 35 9 3
------- ------ ------ ----- ------
Net charge offs (156) (172) (89) (67) (2)
------ ----- ----- ---- ------
Balance at End of Period $2,432 $2,224 $1,793 $1,311 $ 865
===== ===== ===== ===== =====
Net charge offs as a % of
average loans 0.06% 0.09% 0.06% 0.06% 0.00%
==== ==== ==== ===== =====
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 allocated 20% 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 35% 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.
20
We have allocated 45% 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 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. 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 except one commercial loan for $7 thousand, have been consumer loans.
We have changed the allocations to assign greater risk to real estate loans and
commercial loans; consequently, we eliminated the unallocated portion in 2003.
The reason for the changes to these two categories is the increased growth in
these areas in the past year versus the growth in consumer loans. 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 to the allocation of the
allowance for loan losses during the periods presented other than the fast pace
of growth mentioned above.
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
December 31, 1999 through December 31, 2003
(Dollars in Thousands)
December 31, 2003 December 31, 2002 December 31, 2001
Percent Percent Percent Percent Percent Percent
of of of of of of
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
Analysis of Ending Balance
Commercial $851 35% 19.83% $ 445 20% 19.32% $ 359 20% 19.62%
Real estate mortgage 486 20% 65.14% 134 6% 61.45% 108 6% 56.96
Installment 1,095 45% 15.03% 1,090 49% 19.23% 879 49% 23.42%
Unallocated - -% 555 25% 447 25%
----- ---- ------ ------ ---- ------ ----- ---- ------
Total $2,432 100% 100.00% $2,224 100% 100.00% $1,793 100% 100.00%
===== ====== ======= ==== === ====== ===== ====== ======
December 31, 2000 December 31, 1999
Percent Percent Percent Percent
of of of of
Amount Allowance Loans Amount Allowance Loans
Analysis of Ending Balance
Commercial $262 20% 22.84% $ 173 20% 26.94%
Real estate mortgage 79 6% 55.22% 52 6% 50.34%
Installment 642 49% 21.94% 424 49% 22.72%
Unallocated 328 25% 216 25%
----- -- ----- ------ --- ------
Total $2,432 100% 100.00% $865 100% 100.00%
===== ====== ======= === === ======
Investment Securities
Total investment securities decreased to $10.7 million at December 31, 2003 from
$34.3 million at December 31, 2002. From December 31, 2001 to 2002, investment
securities had increased from $5.7 million to $34.3 million. At the end of the
fourth quarter of 2003, we reclassified the entire investment portfolio from
held-to-maturity to available-for-sale for the purpose of providing additional
liquidity for increased loan demands. Prior to this, all investments were
classified as held-to-maturity, but generally had a short-term contractual
maturity.
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 bank franchise taxes. 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:
21
Investment Securities Portfolio
(Dollars in Thousands)
December 31, 2003 2002 2001
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Available for Sale
U.S. Government Agencies $ 10,612 $ 10,614 $ - $ - $ - $ -
Municipal Governments 101 105 - - - -
------ -------- --------- --------- --------- --------
Total Securities AFS $ 10,713 $ 10,719 $ - $ - $ - $ -
========= ======== ========= ======== ======== ========
Amortized Cost
December 31, 2003 2002 2001
--------- -------- ---------
Held To Maturity
U.S. Government Agencies $ - $ 34,204 $ 5,556
Municipal Governments - 101 102
----------- -------- ------
Total Securities HTM $ - $ 34,305 $ 5,658
========== ========= =========
The amortized cost, fair value and weighted average yield of investment
securities at December 31, 2003, 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.
Maturities of Securities
(Dollars in Thousands)
Weighted
Amortized Fair Average
Securities Available for Sale Cost Value Yield
-----------------------------
Due in one year or less $ 9,907 $ 9,901 1.23%
Due after one year through
five years 806 818 3.15%
--------- --------- ------
Total $ 10,713 $ 10,719 1.37%
========= ========== =====
The carrying amount of securities pledged by us to secure public deposits was
$3.3 million at December 31, 2003.
Except for U. S. Government securities, we have no securities with any issuer
that exceeds 10% of stockholders' equity.
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan
Bank, is required to hold stock in each. These equity securities are restricted
from trading and are recorded at a cost of $1.4 million as of December 31, 2003.
Prior to 2003, the Bank was only a member of the Federal Reserve Bank and its
investment is recorded at a cost of $539 thousand and $529 thousand as of
December 31, 2002 and 2001, respectively.
Deposits
We continued to have excellent growth in our deposits which totaled $308.2
million at December 31, 2003 and $263.8 million at December 31, 2002, an
increase of $44.4 million, or 16.84%. The increase in deposits is the result of
new branches opened in 2002 and 2003. The largest areas of growth were in demand
and savings deposits. Noninterest bearing demand deposits increased $10.9
million, or 48.78%, to $33.3 million in 2003 from $22.4 million in 2002.
Interest-bearing demand deposits grew $10.1 million, or 103.91%, to $19.8
million in 2003 from $9.7 million in 2002. Savings deposits also increased $13.3
million, or 49.00%, to $40.4 million in 2003 from $27.1 million in 2002. Time
deposits increased slightly by $10.1 million, or 4.94%, from $204.6 million in
2002 to $214.7 million in 2003.
Time deposits of $100,000 or more equaled approximately 18.53% of deposits at
the end of 2003 and 19.17% at the end of 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.
Maturities of time certificates of deposit of $100,000 or more outstanding are
summarized as follows:
22
Maturities of Time Deposits of $100 Thousand and More
(Dollars in Thousands)
December 31, 2003
Three months or less $12,122
Over three months through twelve months 30,900
Over one year through three years 12,072
Over three years 2,027
------
Total $57,121
======
Noninterest Income
Noninterest income increased from $1.4 million in 2002 to $1.8 million in 2003.
This is an increase of $395 thousand for the year, or 27.97%. The major sources
of noninterest income include overdraft fees on deposit accounts and insurance
commissions. Overdraft fees increased from $660 thousand for 2002 to $918
thousand for 2003, an increase of $258 thousand, or 39.09%. This increase is due
to a correlated growth in demand deposit accounts. Insurance commissions
increased from $103 thousand for 2002 to $213 thousand for 2003. This is the
result of increased loans since these are credit life insurance commissions. In
addition, income produced by bank owned life insurance purchased during the
fourth quarter of 2001 decreased to $419 thousand for 2003 from $457 thousand
for 2002. The primary reason for the decrease is the lower interest rates paid.
The minimum rate that will be paid on the bank owned life insurance policies is
4.00%. (See Life Insurance section.) Noninterest income as a percentage of
average assets decreased from .58% in 2002 to .55% in 2003. We anticipate this
percentage to increase in 2004 as we increase non interest income from our new
subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.
Noninterest income increased from $753 thousand in 2001 to $1.4 million in 2002.
The increase is consistent with the growth in our average assets and operations.
The two largest areas of increase were in service charges and bank owned life
insurance. Service charges increased as deposit volumes increased. The bank
owned life insurance for 2002 reflected a full year of income versus a few
months in 2001. The bank owned life insurance policies were not purchased until
the fourth quarter of 2001. Total income for 2002 produced by bank owned life
insurance was $457 thousand as compared to $69 thousand in 2001. Noninterest
income as a percentage of average assets increased from .40% in 2001 to .58 % in
2002.
Noninterest Expense
Noninterest expense increased from $8.2 million in 2002 to $10.8 million in
2003. The increase was largely due to additional staffing and expenses
associated with the new branches opened and the general growth in operations as
salaries and benefits increased from $4.4 million to $6.3 million. We expect
this number to increase during 2004 as we realize a full-year's effect of new
staffing for the new branches opened during 2003. Noninterest expense as a
percentage of average assets decreased from 3.35% for 2002 to 3.30% for 2003.
Noninterest expense in the future will depend on our growth and the number of
new branch locations.
Greater efficiencies will result as we maximize the performance of our branches.
Our efficiency ratio, which is defined as noninterest expense divided by the sum
of net interest income plus noninterest income, was 70.03% for 2003 as compared
to 68.05%. This was slightly higher as the result of additional staffing during
2003. The ratio of assets to full-time equivalent employee was $1.7 million at
the end of 2003 as compared to $2.0 million at the end of 2002. Since we are
still in the growth phase, these numbers will remain lower than peers until we
reach a level of maturity, but should continue to improve.
Noninterest expenses 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 3.19% in 2001 to 3.35%
for 2002.
Income Taxes
Due to timing differences between book and tax treatment of several income and
expense items, a deferred tax liability of $512 thousand has been recognized at
December 31, 2003 as compared to $223 thousand at December 31, 2002. During
2003, we amended prior years' tax returns to accelerate tax depreciation
expenses on certain fixed assets as allowed by certain tax regulations. 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.
23
Life Insurance
We have life insurance policies with three insurance companies on the lives of
four key officers. The Bank is the beneficiary under each policy. The total cash
surrender value of the policies was $8.4 million and $8.0 at December 31, 2003
and December 31, 2002, respectively. Total income for the policies during 2003
was $419 thousand as compared to $457 thousand and $69 thousand for the years
ending 2002 and 2001, respectively. The insurance policies had a yield, net of
mortality costs, of 5.13% for the year 2003 as compared to 5.66% in 2002. The
new interest rate in effect through the end of 2004 is an average of 4.76%. The
minimum guaranteed rate on each of the policies is 4.00%.
Capital
We originally capitalized our company in 1998 with $11.1 million received
through an offering of common stock. In 2000, we increased capital by an
additional $6.0 million through another offering of 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 growth and to maintain acceptable capital ratios.
Total capital at the end of 2003 was $32.8 million compared to $26.5 million in
2002. The increase was $6.3 million, or 23.88%. We remain well capitalized at
the end of 2003, as defined by the capital guidelines of regulatory agencies.
Capital as a percentage of total assets was 9.58% at December 31, 2003 compared
to 9.09% at December 31, 2002, which exceeded regulatory requirements.
The number of shares of common stock issued and outstanding at the end of 2003
was 6,903,003, an increase of 894,610 shares from the 6,008,393 shares at the
end of 2002. Of this increase, 10,000 shares resulted from the exercise of stock
options at a price of $7.50 per share. The remaining 884,610 shares were issued
in the stock offering that was completed in February 2003.
No dividends have been paid historically and none are anticipated in the
foreseeable future. New Peoples' strategic plan is to continue growing. To
accommodate this growth and have sufficient capital, earnings will need to be
retained. When the board of directors considers it prudent to do so, dividends
will be paid.
Liquidity
At the end of December 31, 2003 and 2002, we had liquid assets in the form of
cash, due from banks and federal funds sold of approximately $12.1 million and
$14.9 million, respectively. At December 31, 2003, all of our investments have
been classified as available-for-sale providing an additional source of
liquidity in the amount of $7.4 million, which is net of those securities
pledged as collateral for public funds. We believe that our liquid assets were
adequate at both dates.
In the event we need additional funds, we have the ability to purchase federal
funds under established lines of credit totaling $20 million. We may also borrow
up to $49.4 million from the Federal Home Loan Bank which is secured by a
blanket lien on residential real estate loans. Additional liquidity will be
provided by the future growth that management expects in deposit accounts and
loan repayments. We believe that this future growth will result from an increase
in market share in our targeted trade area. In 2003 alone, we have opened four
new branches and plan to open additional branches during 2004.
As of December 31, 2003, we had time deposits of $164.9 million that mature
within one year. Historically, we have been able to retain a majority of
maturing deposits by establishing business relationships. During the latter part
of 2003, we intentionally allowed some non-core deposits to leave as we improved
our net margin. With recently increased loan demands, we have taken steps to
retain some of these deposits by offering premium rates on short-term deposits.
We continue to offer premium rates at our new branches to attract new customers
and deposits.
Our loan to deposit ratio at year end 2003 was 95.85% as compared to 84.30% at
the end of 2002. We are implementing strategies to increase deposits during 2004
at both the new branches and existing branches. We can lower the ratio as
management deems appropriate by managing the rate of growth in our loan
portfolio. This can be done by changing interest rates charged or limiting the
amount of new loans approved.
Growth in loans and deposits does not always occur in the same time period. An
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 Government Agency securities in
order to provide liquidity or to provide income until the funds are needed for
new loans.
24
We have primarily used the funds provided by common stock issues and deposits to
fund the purchase of banking facilities and the loan portfolio.
Financial Instruments with Off-Balance-Sheet Risk and Credit Risk and
Contractual Obligations
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk as of December 31, 2003 and 2002, is as follows:
2003 2002
------- --------
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 22,080 $ 15,877
Standby letters of credit 721 826
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Unfunded commitments under lines of credit are commitments for possible future
extensions of credit to existing customers. Those lines of credit may not be
drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds certificates of
deposit, deposit accounts, and real estate as collateral supporting those
commitments for which collateral is deemed necessary.
New Peoples and its subsidiaries have the only operating lease obligations.
The following is a breadown of the payment obligations over hte life of the
agreements.
Payments Due by Period
(in thousands)
Less More
than 1 1-3 3-5 than 5
Total year years years years
Contractual Obligations
Operating Lease Obligations $ 301 $ 59 $ 130 $ 61 $ 51
----- ----- ------ ----- -----
Total $ 301 $ 59 $ 130 $ 61 $ 51
===== ====== ===== ===== =====
Analysis of Cash Flows
Our significant cash flows are as follows:
Years Ended December 31,
2003 2002 2001
Cash was Provided by
Operations $3,416 $ 2,273 $1,366
Investment activities
Maturity of securities 98,999 3,500 9,714
Sale of securities 19,941 - -
Sale of property 4 292
Financing Activities
Sale of common stock 3,506 5,412 -
Growth in deposits 44,416 69,794 55,564
------ ------ ------
Total $170,282 $81,271 $66,644
========= ====== ======
25
Cash was used for Investing Activities
Growth in loans $73,200 $43,351 $48,219
Purchase of property, plant and equipment 3,379 2,287 3,751
Investment in life insurance agreements - - 7,500
Purchase of securities 96,569 32,242 3,499
------ ------ -----
Total $173,148 $77,880 $62,969
======= ====== ======
We believe future deposit growth from our branches, along with available lines
of credit, the ability to sell securities in our available for sale investment
portfolio, and the control we may exercise over loan growth will provide
sufficient liquidity to meet future cash demands.
Interest Sensitivity
At December 31, 2003, we had a negative cumulative gap rate sensitivity ratio of
38.63% for the one year re-pricing period, compared to 34.34% at December 31,
2002. This generally indicates that earnings would improve in a declining
interest rate environment as liabilities re-price more quickly than assets.
Conversely, earnings would probably decrease in periods during which interest
rates are increasing. On a quarterly basis, management reviews our interest rate
risk and has decided that the current position is an acceptable risk for a
growing community bank operating in a rural environment.
Interest Sensitivity Analysis
December 31, 2003
(In thousands of dollars)
1- 90 91-365 1 - 3 4-5 6-15
Days Days Years Years Years Over 15 years Total
Uses of funds:
Loans $ 56,666 $ 31,859 $ 36,937 $ 52,675 $ 84,000 $ 33,301 $295,438
Federal funds sold 3,327 - - - - - 3,327
Investments - 9,901 818 - - 1,365 12,084
Bank owned life
insurance - - - - - 8,359 8,359
------ ------- ------- -------- ------- -------- --------
Total earning
assets $ 59,993 $ 41,760 $ 37,755 $ 52,675 $ 84,000 $ 43,025 $319,208
======== ======== ====== ======= ======== ========= =======
Sources of funds:
Int Bearing DDA $ 19,802 $ - $ - $ - $ - $ - $ 19,802
Savings & MMDA 40,418 - - - - - 40,418
Time Deposits 58,244 106,615 39,347 10,499 - - 214,705
------- ----- ------- ------- ------- --------- -------
Total interest
bearing
liabilities $118,464 $106,615 $ 39,347 $ 10,499 $ - $ - $274,925
======== ====== ======== ======= ======== ========= ======
Discrete Gap (58,471) (64,855) (1,592) 42,176 84,000 43,025 44,283
====== ====== ======= ====== ======== ======= =======
Cumulative Gap (58,471) (123,326) (124,918) (82,742) 1,258 44,283
======= ======== ======= ======= ====== ========
Cumulative Gap as %
of Total Earning
Assets -18.32% -38.63% -39.13% -25.92% 0.39% 13.87%
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 and three external board members, 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.
26
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 parallel 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, 2003 and
2002. At both dates, our interest rate risk is within the established
limitations.
Immediate Estimated Increase
Basis Point Change (Decrease) in Net Established
In Interest Rates Interest Income Limitation
December 31,
2003 2002
+300 (1.87)% (4.67)% (20.00)%
+200 (1.24) (3.10) (15.00)
+100 (0.62) (1.55) (7.00)
-100 0.60 2.13 (7.00)
-200 (3.39) 4.09 (15.00)
-300 (10.25) 1.95 (20.00)
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.
27
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
CONTENTS
Page
Independent Auditors' Reports
2003 28
2002 and 2001 29
Consolidated Balance Sheets as of
December 31, 2003 and 2002 30
Consolidated Statements of Income - Years Ended
December 31, 2003, 2002, and 2001 31
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 2003, 2002 and 2001 32
Consolidated Statements of Cash Flows - Years Ended
December 31, 2003, 2002 and 2001 33
Notes to Consolidated Financial Statements 34
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
New Peoples Bankshares, Inc.
Honaker, Virginia
We have audited the consolidated balance sheet of New Peoples Bankshares, Inc.
and subsidiary as of December 31, 2003, and the related consolidated statements
of income, stockholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements
of New Peoples Bankshares, Inc. as of December 31, 2002 and 2001, were audited
by other auditors whose report dated January 17, 2003, expressed an unqualified
opinion on those statements.
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 audit provide a reasonable
basis for our opinion.
In our opinion, the 2003 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, 2003, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ BROWN, EDWARDS AND COMPANY, LLP
January 16, 2004
Bluefield, West Virginia
29
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 the years then
ended. 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 the years then ended, 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
30
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
2003 2002
Cash and due from banks (Note 3) $ 8,746 $ 8,816
Federal funds sold 3,327 6,123
-------- ---------
Total Cash and Cash Equivalents 12,073 14,939
Investment Securities
Available-for-sale 10,719 -
Held-to-maturity, (fair value of
$34,357 in 2002) (Note 4) - 34,305
Loans receivable (Note 5) 295,438 222,394
Allowance for loan losses (Note 6) (2,432) (2,224)
--------- ---------
Net Loans 293,006 220,170
Bank premises and equipment, net (Note 7) 14,291 10,915
Equity securities (restricted) (Note 4) 1,365 539
Accrued interest receivable 1,896 1,846
Life insurance investments 8,359 7,988
Other assets 799 697
------- -------
Total Assets $ 342,508 $ 291,398
======== =========
LIABILITIES
Deposits:
Demand deposits:
Noninterest bearing $ 33,296 $ 22,379
Interest-bearing 19,802 9,711
Savings deposits 40,418 27,126
Time deposits (Note 8) 214,705 204,589
-------- ---------
Total Deposits 308,221 263,805
Accrued interest payable 496 702
Accrued expenses and other liabilities 986 409
-------- ---------
Total Liabilities 309,703 264,917
-------- ---------
STOCKHOLDERS' EQUITY (Notes 12 & 15)
Common stock - $2.00 par value; 12,000,000
shares authorized; 6,903,003 and 6,008,393
shares issued and outstanding
for 2003 and 2002, respectively 13,806 12,017
Additional Paid-in-Capital 13,076 5,948
Stock Subscriptions - 5,411
Retained earnings 5,919 3,105
Accumulated other comprehensive income 4 -
--------- ---------
Total Stockholders' Equity 32,805 26,481
-------- ---------
Total Liabilities and Stockholders' Equity $ 342,508 $ 291,398
======== =========
The accompanying notes are an integral part of this statement.
31
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
INTEREST AND DIVIDEND INCOME 2003 2002 2001
---- ---- ----
Loans including fees $ 19,402 $ 16,675 $ 14,602
Federal funds sold 172 200 395
U.S. Treasury securities and
U. S. Government agencies 322 133 238
Dividends on Equity securities
(restricted) 60 32 32
-------- --------- -------
Total Interest and Dividend Income 19,956 17,040 15,267
--------- -------- -------
INTEREST EXPENSE
Deposits
Demand 110 107 120
Savings 441 451 379
Time deposits below $100,000 4,211 4,289 5,570
Time deposits above $100,000 1,559 1,528 1,881
Other 11 - -
--------- --------- ---------
Total Interest Expense 6,332 6,375 7,950
-------- -------- ---------
NET INTEREST INCOME 13,624 10,665 7,317
PROVISION FOR LOAN LOSSES (Note 6) 364 603 571
--------- -------- ---------
Net Interest Income after
Provision for Loan Losses 13,260 10,062 6,746
-------- -------- ---------
NONINTEREST INCOME
Service charges 936 663 458
Fees, commissions and other income 452 292 226
Loss on sale of securities (5) - -
Life insurance investment income 419 457 69
-------- -------- ---------
Total Noninterest Income 1,802 1,412 753
-------- -------- ---------
NONINTEREST EXPENSES
Salaries and employee benefits
(Note 11) 6,258 4,431 3,403
Occupancy expense 627 458 260
Equipment expense 1,152 917 707
Advertising and public relations 211 190 126
Stationery and supplies 203 211 150
Other operating expenses 2,350 2,011 1,287
-------- -------- ---------
Total Noninterest Expenses 10,801 8,218 5,933
-------- -------- ---------
INCOME BEFORE INCOME TAXES 4,261 3,256 1,565
INCOME TAX EXPENSE (Note 9) 1,447 1,078 556
-------- -------- ---------
NET INCOME $ 2,814 $ 2,178 $ 1,009
======== ======== =========
Earnings Per Share (1)
Basic .41 .36 .17
======== ========= ========
Fully Diluted .41 .35 .17
======== ========= =========
Average Weighted Shares of
Common Stock(1)
Basic 6,875,754 6,104,734 6,000,000
========= ========= =========
Fully Diluted 6,937,309 6,168,000 6,000,000
========= ========== ========
(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.
32
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS INCLUDING SHARE DATA )
Retained Accum-
Earning/ sulated Other
Shares of Additional Common (Accum- Compre- Total Compre-
Common Common Paid in Stock Sub- ulated hensive Shareholders' hensive
Stock Stock Capital scriptions Deficit) Income Equity Income
Balance, December 31, 2000 3,000 $ 12,000 $ 5,964 $ - $ (82) $ - $ 17,882 $ -
Net Income 1,009 1,009 1,009
----- ------- --------- ------- ------ -------- --------- --------
Balance, December 31, 2001 3,000 $ 12,000 $ 5,964 $ - $ 927 $ - $ 18,891 $ 1,009
------- ------- ------ ------- -------- -------- --------- --------
Net Income $ 2,178 $ 2,178 $ 2,178
Stock Split 3,000
Stock Options Exercised 2 5 14 19
Common Stock Subscribed 5,469 5,469
Common Stock Issued 6 12 46 (58) -
Cost of Common Stock Offering (76) (76)
----- ------ --------- -------- ------- -------- --------- ------
Balance, December 31, 2002 6,008 $ 12,017 $ 5,948 $ 5,411 $ 3,105 $ - $ 26,481 $ 2,178
------- ------ ------ ------- -------- --------- ------- -------
Net Income 2,814 2,814 2,814
Unrealized gains (net of tax) on
available-for-sale securities,
net of reclassification adjustment
of $5 4 4 4
Stock Options Exercised 10 20 55 75
Common Stock Issued 885 1,769 7,076 (5,411) 3,434
Cost of Common Stock Offering (3) (3)
----- ----- --------- ------- ------- ------- -------- -------
Balance, December 31, 2003 6,903 $ 13,806 $ 13,076 $ - $ 5,919 $ 4 $ 32,805 $ 2,818
==== ====== ====== ======== ======= ======== ======= ======
The accompanying notes are an integral part of this statement.
33
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,814 $ 2,178 $ 1,009
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,121 866 594
Provision for loan losses 364 603 571
Income (less expenses) on life
insurance (371) (419) 69
Loss on sale of foreclosed real estate 32 72 88
Loss on sale of investment securities 5 - -
Amortization of bond premiums 395 86 -
Deferred tax benefit (expense) 286 435 (51)
Loss on disposal of fixed assets - - 12
Net change in:
Interest receivable (50) (208) (264)
Other assets (138) 202 (344)
Accrued interest payable (206) 15 (100)
Accrued expense and other
liabilities 291 (691) 389
------ -------- ------
Net Cash Provided by Operating Activities 4,543 3,139 1,972
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (73,200) (43,351) (48,219)
Purchase of securities held-to-maturity (95,744) (32,232) (3,499)
Proceeds from sale of securities
available-for-sale 19,936 - -
Proceeds from maturities of securities
available-for-sale - - 8,913
Proceeds from maturities of securities
held-to-maturity 98,999 3,500 801
Purchase of Federal Reserve Bank stock (120) (10) -
Purchase of Federal Home Loan Bank stock (706) - -
Payments for the purchase of property (4,500) (3,152) (4,357)
Proceeds from the sale of property 4 292 -
Deposits with life insurance companies - - (7,500)
-------- -------- ---------
Net Cash Used in Investing Activities (55,331) (74,953) (53,861)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from common stock
offering 3,431 5,393 -
Common stock options exercised 75 19 -
Net change in:
Demand deposits 21,008 8,757 9,088
Savings deposits 13,292 8,479 9,486
Time deposits 10,116 52,558 36,990
-------- -------- --------
Net Cash Provided by Financing
Activities 47,922 75,206 55,564
------ ------ -------
Net increase (decrease) in cash and
cash equivalents (2,866) 3,391 3,675
Cash and Cash Equivalents, Beginning
of Year 14,939 11,547 7,872
--------- --------- --------
Cash and Cash Equivalents, End of Year $ 12,073 $ 14,939 $ 11,547
======== ======== ========
Supplemental Disclosure of Cash Paid During
the Year for:
Interest 6,538 6,360 8,050
Taxes 1,065 1,394 556
Supplemental Disclosure of Non
Cash Transactions:
Loans made to finance sale of foreclosed
real estate (33) 33 197
Transfer of securities from held-to-
maturity to available-for-sale 30,655 - -
The accompanying notes are an integral part of this statement
34
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
Nature of Operations - New Peoples Bankshares, Inc. ("New Peoples") is a bank
holding company whose principal activity is the ownership and management of a
community bank. New Peoples Bank ("Bank") was organized and incorporated under
the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced
operations on October 28, 1998, after receiving regulatory approval. As a state
chartered bank, the Bank is subject to regulations by the Virginia Bureau of
Financial Institutions, the Federal Deposit Insurance Corporation and the
Federal Reserve Bank. The Bank provides general banking services to individuals,
small and medium size businesses and the professional community of southwestern
Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, New
Peoples formed two wholly owned subsidiaries, NPB Financial Services, Inc. and
NPB Web Services, Inc.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation Policy - The consolidated financial statements include New
Peoples, the Bank, NPB Financial Services, Inc., and NPB Web Services,
Inc. 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 the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions.
Cash and Cash Equivalents - Cash and cash equivalents as used in the cash flow
statements include cash and due from banks and federal funds sold. The Bank
maintains amounts due from banks, which, at times, may exceed federally insured
limits. No losses have been experienced in such accounts.
Investment Securities - Management determines the appropriate classification of
securities at the time of purchase. If management has the intent and the Bank
has the ability at the time of purchase to hold securities until maturity, they
are classified as held to maturity and carried at amortized historical cost.
Securities not intended to be held to maturity are classified as available for
sale and carried at fair value. Securities available for sale are intended to be
used as part of the Bank's asset and liability management strategy and may be
sold in response to changes in interest rates, prepayment risk or other similar
factors.
The amortization of premiums and accretion of discounts are recognized in
interest income using the effective interest method over the period to maturity.
Realized gains and losses on dispositions are based on the net proceeds and the
adjusted book value of the securities sold, using the specific identification
method. Realized gains (losses) on securities available-for-sale are included in
noninterest income and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Unrealized gains and
losses on investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and losses are
credited or charged to shareholders' equity, whereas realized gains and losses
flow through the Bank's income statement.
Loans - Loans are carried on the balance sheet at unpaid principal balance, 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.
It is the Bank's policy to stop accruing interest on a loan, and classify that
loan as non-accrual under the following circumstances: (a) whenever we are
advised by the borrower that scheduled payment or interest payments cannot be
met, (b) when our best judgment indicates that payment in full of principal and
interest can no longer be expected, or (c) when any such loan or obligation
becomes delinquent for 90 days unless it is both well secured and in the process
of collection. All interest accrued but not collected for loans that are placed
on nonaccrual or charged off are reversed against interest income. The interest
on these loans is accounted for on the cash basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
prospects for future contractual payments are reasonably assured.
35
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The loan portfolio is analyzed periodically and
loans are assigned a risk rating. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. A general allowance is made for all other loans not considered impaired
as deemed appropriate by management. In determining the adequacy of the
allowance, management considers the following factors: the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans, the estimated value of any underlying collateral, prevailing
economic conditions, and other inherent risks. While management uses available
information to recognize losses on loans, further reductions in the carrying
amounts of loans may be necessary based on changes in local collateral values
and future cash flows on impaired loans. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Loans are charged against
the allowance for loan losses when management believes that collectibility of
the principal is unlikely. Past due status is determined based on contractual
terms.
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 other equipment 5 to 7 years
Advertising Cost - Advertising costs are expensed in the period incurred.
Stock Options - Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," sets forth compensation recognition
principles that are based on a fair value model. New Peoples has elected another
alternative provided for under SFAS 123, which is to account for the activity
under the Plan using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost is not recognized in the financial
statements for grants of stock options as all options granted under the Plan
have an exercise price equal to the fair market value of the underlying stock at
date of grant.
Had compensation cost for New Peoples' stock option plan been determined
consistent with SFAS 123, net income would have been reduced to the pro forma
amounts reflected below for the years ended December 31:
Years Ended December 31, 2003 2002 2001
Net Income, as reported $2,814 $2,178 $1,009
Deduct: Compensation expense
related to stock plans using
fair value accounting, net of tax 262 - 751
------ ------ ------
Net Income, on a pro forma basis $2,552 $2,178 $ 257
====== ====== ======
The fair value of each option was $3.30 in 2003 and $2.99 in 2001 and were
estimated at the date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model was originally developed for use in
estimating the fair value of traded options, which have different
characteristics from New Peoples' stock options. The model is also sensitive to
changes in assumptions, which can materially affect the fair value estimate. The
following weighted - average assumptions were used to determine the fair value
of options in the years 2003, 2002 and 2001.
Years Ended December 31, 2003 2002 2001
Dividend yield 0.00% n/a 0.00%
Expected life 10 years n/a 10 years
Expected volatility 0.00% n/a 0.00%
Risk free interest rate 4.01% n/a 5.09%
36
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
Financial Instruments - Off-balance-sheet instruments - In the ordinary course
of business, New Peoples has entered into commitments to extend credit. Such
financial instruments are recorded in the financial statements when they are
funded.
Comprehensive Income - Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Earnings Per Share - Basic earnings per share computations are based on the
weighted average number of shares outstanding during each year. Dilutive
earnings per share reflects the additional common shares that would have been
outstanding if dilutive potential common shares had been issued. Potential
common shares that may be issued relate to outstanding options determined by the
Treasury Method. Weighted average shares outstanding at December 31, 2002
included outstanding stock subscriptions as a result of the ongoing stock
offering at December 31, 2002. During 2003, the stock subscriptions were
converted to shares of common stock. The weighted average shares outstanding at
December 31, 2003 reflect the converted subscriptions and the additional stock
issued.
Reclassification of Financial Statement Presentation - Certain reclassifications
have been made to the 2002 and 2001 financial statements to conform with the
2003 financial statement presentation. Such reclassification had no effect on
net income as previously reported.
NOTE 3 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
The Bank had federal funds sold and cash on deposit to other commercial banks
amounting to $6.0 million and $10.0 million at December 31, 2003 and 2002,
respectively. Deposit amounts at other commercial banks may, at times, exceed
federally insured limits.
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and estimated fair value of securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars are in thousands) Cost Gains Losses Value
December 31, 2003
Available for Sale
U.S. Government Agencies $ 10,612 $ 8 $ 6 $ 10,614
Municipal Governments 101 4 - 105
Total Securities AFS $ 10,713 $ 12 $ 6 $ 10,719
Held to Maturity $ - $ - $ - $ -
December 31, 2002
Available for Sale $ - $ - $ - $ -
Held To Maturity
U.S. Government Agencies $ 34,204 $ 57 $ 11 $ 34,250
Municipal Governments 101 6 - 107
Total Securities HTM $ 34,305 $ 63 $ 11 $ 34,357
37
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 INVESTMENT SECURITIES (CONTINUED):
During the month of December 2003, the Bank reclassified all securities from
held to maturity to available for sale to provide additional liquidity. At
December 31, 2003, the Bank had not identified any securities as held to
maturity and no securities were classified as available for sale at December 31,
2002.
The amortized cost and fair value of investment securities at December 31, 2003,
by contractual maturity, are shown in the following schedule. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Weighted
(Dollars are in thousands) Amoritized Fair Average
Securities Available for Sale Cost Value Yield
---------------------------
Due in one year or less $ 9,907 $ 9,901 1.23%
Due after one year
through five years 806 818 3.15%
Total $ 10,713 $ 10,719 1.37%
Investment securities with a carrying value of $3.3 million and $2.8 million at
December 31, 2003 and 2002, were pledged to secure public deposits and for other
purposes required by law.
During the fourth quarter of 2003, the Bank realized a loss on the sale of
available for sale securities of $5 thousand and received total proceeds of
$19.9 million.
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan
Bank, is required to hold stock in each. These equity securities are restricted
from trading and are recorded at a cost of $1.4 million and $539 thousand as of
December 31, 2003 and 2002, respectively.
NOTE 5 LOANS:
Loans receivable outstanding at December 31, are summarized as follows:
2003 2002
(Dollars are in thousands)
Commercial, financial and agricultural $ 58,593 $ 42,959
Real estate - construction 7,258 5,615
Real estate - mortgages 185,191 131,050
Installment loans to individuals 44,396 42,770
--------- ----------
Total Loans $ 295,438 $ 222,394
========= ==========
The following is a summary of information at December 31, pertaining to
nonperforming assets:
(Dollars are in thousands) 2003 2002
---- ----
Principal:
Nonaccrual Loans $ 539 $ 761
Loans past due 90 days or more
still accruing interest 26 -
------ ------
Total Loans $ 565 $ 761
========= ==========
At the end of 2003, impaired loans totaled $331 thousand with a valuation
allowance of $95 thousand. Interest income not recognized on these loans was $2
thousand. The average investment in impaired loans was $49 thousand in 2003.
38
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses are as follows:
(Dollars are in thousands) 2003 2002 2001
----
Balance, beginning of year $ 2,224 $ 1,793 $ 1,311
Provision for loan losses 364 603 571
Recoveries of loans charged off 31 35 9
Loans charged off (187) (207) (98)
--------- --------- ---------
Balance, End of Year $ 2,432 $ 2,224 $ 1,793
========= ========= =========
Percentage of Loans 0.82% 1.00% 1.00%
NOTE 7 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment at December 31, are summarized as follows:
2003 2002
(Dollars are in thousands)
Land $ 2,960 $ 2,189
Buildings and improvements 8,252 6,557
Furniture and equipment 4,909 3,877
Vehicles 248 138
Construction in progress 1,226 339
--------- ---------
17,595 13,099
Less accumulated depreciation (3,304) (2,184)
---------- ----------
Bank Premises and Equipment $ 14,291 $ 10,915
========= =========
Depreciation expense for 2003, 2002 and 2001 was $1.1 million, $866 thousand,
and $594 thousand respectively.
At December 31, 2003, construction in progress included the costs of buildings
and land purchased for a new branch at Abingdon, Virginia and the operations
center at Honaker, Virginia. At December 31, 2002, construction in progress
included the costs of buildings and land for new branches in Grundy, Virginia
and Bloomingdale, Tennessee both of which have been completed and are utilized
as full-service branches in 2003.
NOTE 8 OTHER TIME DEPOSITS:
The aggregate amount of time deposits with a minimum denomination of $100,000
was $57.1 million and $50.6 million at December 31, 2003 and 2002, respectively
At December 31, 2003, the scheduled maturities of certificates of deposit are as
follows (dollars are in thousands):
2004 $ 164,859
2005 24,337
2006 15,010
2007 8,192
2008 2,123
After five years 184
----------
Total $ 214,705
==========
NOTE 9 INCOME TAX EXPENSE:
The components of income tax expense for the years ended December 31, are as
follows:
(Dollars are in thousands) 2003 2002 2001
---- ---- ----
Current expense $ 1,161 $ 643 $ 607
Deferred expense (benefit) 286 435 (51)
--------- --------- ----------
Net Federal Income Tax $ 1,447 $ 1,078 $ 556
========= ========= =========
39
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 INCOME TAX EXPENSE (CONTINUED):
The deferred tax expense (benefit) resulting from temporary differences for the
years ended December 31 is as follows:
(Dollars are in thousands) 2003 2002 2001
---- ---- ----
Organization and start-up cost $ 7 $ 19 $ 17
Provision for loan losses (105) (149) (145)
Depreciation 284 438 77
Deferred compensation expense (23) (27) -
Unrealized accretion income (4) 4 -
Net earnings on bank owned
life insurance 126 165 -
Capitalized interest and
repair expense 1 (15) -
--- ------ ------
Deferred Income Tax Expense
(Benefit) $ 286 $ 435 $ (51)
========= ========= ==========
The net deferred tax assets and liabilities resulting from temporary differences
as of December 31 are summarized as follows:
(Dollars are in thousands) 2003 2002 2001
---- ---- ----
Deferred Tax Assets:
-------------------
Organization and start-up cost $ 9 $ 17 $ 36
Allowance for loan losses 713 608 459
Deferred compensation 51 27 -
Capitalized interest and repair
expense 19 20 5
---- ---- ------
Total Assets 792 672 500
------- --------- ---------
Deferred Tax Liabilities:
Accelerated depreciation 1,010 725 288
Unrealized accretion income - 4 -
Unrealized gain on securities
Available for sale 2 - -
Net unrealized income on bank
owned life insurance 292 166 -
--------- --------- ----------
Total Liabilities 1,304 895 288
--------- --------- ---------
Net Deferred Tax Asset
(Liability) $ (512) $ (223) $ 212
====== ======= ========
The following table summarizes the differences between the actual income tax
expense and the amounts computed using the federal statutory tax rates:
(Dollars are in thousands) 2003 2002 2001
---- ---- ----
Income tax expense at the
applicable
federal rate $ 1,450 $ 1,107 $ 532
Permanent differences resulting
from:
Nondeductible expenses 3 3 9
Tax exempt interest income (17) (15) -
State income taxes less federal
tax effect 12 7 -
Other adjustments (1) (24) 15
---------- ---------- ---------
Income Tax Expense $ 1,447 $ 1,078 $ 556
========= ========= =========
Certain deferred tax assets and deferred tax liabilities for 2002 have been
restated to conform with amended tax returns filed. Current and deferred income
tax expense for 2002 has also been reclassified due to the changes in deferred
tax assets and liabilities.
40
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 RELATED PARTY TRANSACTIONS:
During the year, officers and directors (and companies controlled by them) were
customers of and had loan transactions with the Bank in the normal course of
business which amounted to $7.9 million at December 31, 2003 and $6.8 million at
December 31, 2002. The December 31, 2002 balance is restated by an increase of
$893 thousand due to two additional credits reclassified as related party
transactions. During the year ended December 31, 2003, total principal additions
were $12.5 million and principal payments were $11.4 million. These transactions
were made on substantially the same terms as those prevailing for other
customers and did not involve any abnormal risk.
NOTE 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 $178 thousand, $143
thousand, and $110 thousand to the defined contribution plan for 2003, 2002 and
2001, respectively.
In addition, during 2002, the Bank established a salary continuation plan for
key executives, which is funded by single premium life insurance policies.
Expenses related to the plan were $69 thousand and $80 thousand for 2003 and
2002, respectively.
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, 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 ("the 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.
The Plan will expire on May 31, 2011, unless terminated earlier by the Board of
Directors. At December 31, 2003, there were 567,500 additional shares available
for grant under the Plan.
Information about stock options outstanding at December 31, 2003 follows:
Weighted
Average Weighted
Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
$ 7.50 240,466 8.00 years $ 7.50
$ 10.00 79,500 9.00 years $ 10.00
-------- ---------------- -----------
Totals 319,966 8.25 years $ 8.12
41
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 STOCK OPTION PLAN (CONTINUED):
A summary of the status of New Peoples' stock option plan is presented below:
2003 2002 2001
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
Outstanding and exercisable,
beginning of year 252,466 $ 7.50 256,000 $ 7.50 - $ -
Granted 79,500 10.00 - - 256,000 7.50
Exercised (10,000) 7.50 (2,534) 7.50 - -
Forfeited (2,000) 7.50 (1,000) 7.50 - -
------- ------ ------- ----- --------- ---------
Outstanding and exercisable,
end of year 319,966 $ 8.12 252,466 $ 7.50 256,000 $ 7.50
======= ===== ======= ===== ========== ===========
NOTE 14 LIFE INSURANCE INVESTMENTS:
The Bank purchased $7.5 million in 2001 with various life insurance companies.
The deposit had a guaranteed interest rate of 5.35% through the year 2003. The
new interest rate through 2004 is an average of 4.755%. The minimum guaranteed
rate on each of the policies is 4.00%.
In 2002, life insurance policies insuring key officers were issued. The policies
are owned by the bank and the income on the policies is used to fund a salary
continuation plan for the officers.
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 System 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, 2004, approximately $6.0 million was available for
dividend distribution.
NOTE 16 AVAILABLE LINES OF CREDIT:
The Bank has federal funds lines of credit with correspondent banks totaling
$20.0 million as of December 31, 2003. In addition, the Bank may borrow up to
$49.4 million from the Federal Home Loan Bank which is secured by a blanket lien
on residential real estate loans.
NOTE 17 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:
(Dollars are in thousands) 2003 2002
---- ----
Commitments to extend credit $22,080 $15,877
Standby letters of credit 721 826
42
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED):
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.
NOTE 18 CONCENTRATION OF CREDIT RISK:
New Peoples recognizes a concentration as any obligation, direct or indirect, of
the same or affiliated interests which represent 25% or more of its capital
structure, or $8.2 million as of December 31, 2003. Certain concentrations may
pose credit risk. A concentration of credit risk exists in bank owned life
insurance as described in Note 14. 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. Through periodic credit analyses, management monitors concentrations
to assess and mitigate potential losses that may arise.
NOTE 19 REGULATORY MATTERS:
New Peoples and the Bank are subject to various capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly, additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on New Peoples' and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, New Peoples and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require New Peoples and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2003 and 2002, that
New Peoples and the Bank meet all capital adequacy requirements to which they
are subject.
As of September 22, 2003, the most recent date of notification, the Board of
Governors of the Federal Reserve System 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. New Peoples' and the Bank's actual
capital amounts and ratios are presented in the table as of December 31, 2003
and 2002, respectively.
43
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 REGULATORY MATTERS (CONTINUED):
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
December 31, 2003:
Total Capital to Risk
Weighted Assets
New Peoples $ 35,233 13.10% $21,510 8% $ N/A N/A
The Bank: 31,346 11.66% $21,510 8% $26,887 10%
Tier 1 Capital to Risk
Weighted Assets:
New Peoples 32,801 12.20% 10,755 4% N/A N/A
The Bank 28,914 10.75% 10,755 4% 16,132 6%
Tier 1 Capital to Average
Assets:
New Peoples 32,801 9.29% 14,122 4% N/A N/A
The Bank 28,914 8.19% 14,122 4% 17,652 5%
December 31, 2002:
Total Capital to Risk
Weighted Assets:
New Peoples $ 28,706 13.59% $16,893 8% $ N/A N/A
The Bank 25,564 12.11% $16,893 8% $21,116 10%
Tier 1 Capital to Risk
Weighted Assets:
New Peoples 26,481 12.54% 8,446 4% N/A N/A
The Bank 23,339 11.05% 8,446 4% 12,670 6%
Tier 1 Capital to Average
Assets:
New Peoples 26,481 9.31% 11,372 4% N/A N/A
The Bank 23,339 8.21% 11,372 4% 14,215 5%
NOTE 20 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, 2003
and 2002, are as follows:
December 31, 2003 December 31, 2002
Estimated Carrying Estimated Carrying
(Dollars are in thousands) Fair Value Value Fair Value Value
----------- -------- ---------- ---------
Financial Assets
----------------
Cash and due from bank $ 8,746 $ 8,746 $ 8,815 $ 8,815
Federal funds sold 3,327 3,327 6,123 6,123
Investment securities 10,719 10,719 34,357 34,305
Equity securities
(restricted) 1,365 1,365 539 539
Loans 297,287 295,438 224,625 222,395
Accrued interest receivable 1,896 1,896 1,846 1,846
Life insurance investments 8,359 8,359 7,988 7,988
Financial Liabilities
Demand Deposits:
Non-interest bearing 33,296 33,296 22,379 22,379
Interest-bearing 19,800 19,800 9,711 9,711
Savings deposits 40,352 40,352 27,126 27,126
Time deposits 216,321 214,705 205,723 204,589
Accrued interest payable 496 496 702 702
44
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED): The
carrying value of cash and due from banks, federal funds sold, interest-bearing
deposits, 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 months of December 2003 and 2002.
NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(In Thousands)
ASSETS 2003 2002
Due from banks $ 3,785 $ 3,135
Investment in subsidiary 28,987 23,339
Other assets 42 20
--------- ---------
Total Assets $ 32,814 $ 26,494
========= =========
LIABILITIES
Accounts payable $ 9 $ -
Due to subsidiary bank - 13
---------- ----------
Total Liabilities $ 9 $ 13
--------- ---------
STOCKHOLDERS' EQUITY
Common stock - $ 2.00 par value, 12,000,000
shares authorized; 6,903,003 and
6,008,393 shares issued and outstanding
for 2003 and
2002, respectively 13,806 12,017
Paid-in-Surplus 13,076 5,948
Stock subscriptions - 5,411
Retained earnings 5,919 3,105
Accumulated other comprehensive income (loss) 4 -
--------- ---------
Total Stockholders' Equity 32,805 26,481
--------- ---------
Total Liabilities and Stockholders' Equity $ 32,814 $ 26,494
========= =========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002
AND ONE MONTH ENDED DECEMBER 31, 2001
(In Thousands)
2003 2002 2001
Income
Dividends from subsidiaries $ - $ - $ 25
Undistributed income from
subsidiaries 2,872 2,194 12
-------- -------- -------
Total Income 2,872 2,194 37
-------- --------- ---------
Expenses
Legal fees 7 - 33
Accounting fees 45 - -
Other operating expenses 36 - -
Shareholder related expenses - 24 -
--------- --------- --------
Total Expenses 88 24 33
-------- --------- --------
Income before Income Taxes 2,784 2,170 4
Income Tax Benefit 30 8 3
-------- --------- --------
Net Income $ 2,814 $ 2,178 $ 7
======== ========= ========
45
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002
AND THE ONE MONTH ENDED DECEMBER 31, 2001
(DOLLARS AND SHARES IN THOUSANDS)
2003 2002 2001
Cash Flows From Operating Activities:
Net Income $ 2,814 $ 2,178 $ 7
Adjustments to reconcile net
income to net cash
used in operating activities:
Income of subsidiary bank (2,872) (2,194) (12)
Net change in:
Other assets (22) (17) (3)
Accounts payable (4) 5 8
------- ------ ------
Net Cash Used in Operating Activities (84) (27) -
------- -------- ------
Cash Flows From Investing Activities:
Investment in subsidiary (2,772) (2,250) -
------- --------- --------
Net Cash Used in Investing Activities (2,772) (2,250) -
--------- ------- --------
Cash Flows From Financing Activities:
Net proceeds from common stock
offering 3,431 5,393 -
Exercise of stock options 75 19 -
------ ------ -------
Net Cash Provided by Financing
Activities 3,506 5,412 -
------ ------- ------
Net Increase in Cash and Cash
Equivalents 650 3,135 -
Cash and Cash Equivalents,
Beginning of Year 3,135 - -
------ ------ ------
Cash and Cash Equivalents, End of Year $ 3,785 $ 3,135 $ -
======== ======= ======
Supplemental Information:
Non-cash transactions: Transfer of
3,000 shares of New Peoples stock
for 3,000 shares of the Bank's - - 18,883
NOTE 22 RECENT ACCOUNTING DEVELOPMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities"(FIN 46"),
which addresses consolidation by business enterprises of variable interest
entities. On October 31, 2003, the FASB proposed a modification and
interpretation of FIN 46. Evaluation of FIN 46 and SFAS 150, ("FAS 150") on the
treatment of debt associated with trust preferred securities is in process.
Adoption of this statement did not have a material effect on New Peoples.
Conversely, SFAS 150 requires the consolidation of these subsidiaries and the
presentation of the related debt instruments as a liability. This new statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is (1) issued in
the form of shares that is mandatorily redeemable, (2) at inception embodies an
obligation to repurchase the issuer's equity, or is indexed to such an
obligation, and that requires or may require the issuer to settle the obligation
by transferring assets, or (3) embodies an unconditional obligation, or a
financial instrument other than an outstanding share that embodies a conditional
obligation, that the issuer must or may settle by issuing a variable number of
its equity shares provided certain conditions are met; as a liability (or asset
in some circumstances). Adoption of this statement did not have a material
effect on New Peoples.
46
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED
NOTE 22 RECENT ACCOUNTING DEVELOPMENTS (CONTINUED):
In April 2003, FASB issued SFAS 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This new standard amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement is effective for contracts
entered into or modified after June 30, 2003. Adoption of this statement did not
have a material effect on New Peoples.
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148 - "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123 (Accounting for Stock-Based
Compensation)". The purpose of the statement is to i) enable companies that
choose to adopt the fair value based method to report the full effect of
employee stock options in their financial statements immediately upon adoption
and ii) make available to investors more frequent disclosure about the cost of
employee stock options. In addition, the statement requires more prominent
disclosures about the cost of stock-based employee compensation and an increase
in the frequency of those disclosures to include publication in quarterly
financial statements. Prior to SFAS 148, companies were not required to present
stock option disclosures in interim financial statements. The disclosures
required in annual financial statements are included in Note 1.
In October 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 147 - "Acquisitions of Certain Financial Institutions". This new
Standard, which became effective October 1, 2002, provides interpretive guidance
on the application of the purchase method to acquisitions of financial
institutions. Accordingly, the requirement to amortize any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. Adoption of this
statement did not have a material effect on New Peoples.
In June 2002, the FASB issued SFAS 146 - "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement is not anticipated to have a
material impact on the Corporation.
In April 2002, the FASB issued SFAS 145. This Statement rescinds SFAS 4,
Reporting Gains and Losses from extinguishment of Debt, and an amendment of that
Statement, SFAS 64, Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS 145 is not expected to have a material impact on the
Corporation's financial position or results of operations.
NOTE 23 SELECTED QUARTERLY INFORMATION(Unaudited)
2003 Quarters
(Dollars and shares in thousands) Fourth Third Second First
Income statement
Interest income $ 5,384 $ 5,102 $ 4,838 $ 4,632
Interest expense 1,459 1,610 1,597 1,666
Net interest income 3,925 3,492 3,241 2,966
Noninterest income 503 491 440 373
Total revenue 4,428 3,983 3,681 3,339
Provision for credit losses - 30 174 160
Gains (losses) on sales of
securities (5) - - -
Noninterest expense 3,132 2,798 2,608 2,268
Income before income taxes 1,296 1,155 899 911
Income tax expense 447 394 306 300
Net income 849 761 593 611
Average common shares issued and
outstanding 6,903 6,901 6,898 6,801
Average diluted common shares
issued and
outstanding 6,971 6,970 6,968 6,871
Period end balance sheet
Total loans and leases $295,438 $268,745 $250,942 $234,170
Total assets 342,508 348,672 328,262 303,335
Total deposits 308,221 314,966 295,800 271,330
Total shareholders' equity 32,805 31,953 31,155 30,562
47
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23 SELECTED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED):
2002 Quarters
(Dollars and shares in thousands)Fourth Third Second First
Income statement
Interest income $ 4,566 $ 4,378 $ 4,126 $ 3,970
Interest expense 1,807 1,564 1,429 1,575
Net interest income 2,759 2,814 2,697 2,395
Noninterest income 378 369 367 298
Total revenue 3,137 3,183 3,064 2,693
Provision for credit losses 127 198 148 130
Gains (losses) on sales of
securities - - - -
Noninterest expense 2,459 2,124 1,941 1,694
Income before income taxes 551 861 975 869
Income tax expense 109 322 357 290
Net income 442 539 618 579
Average common shares issued and
outstanding 6,008 6,000 6,000 6,000
Average diluted common shares
issued
and outstanding 6,168 6,064 6,064 6,073
Period end balance sheet
Total loans and leases $ 222,394 $ 212,980 $202,556 $189,763
Total assets 291,398 265,762 233,409 226,413
Total deposits 263,805 243,814 212,475 205,324
Total shareholders' equity 26,481 20,627 20,087 19,470
48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, New Peoples carried out an
evaluation, under the supervision and with the participation of New Peoples'
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, New Peoples' Chief Executive Officer and
Chief Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to New Peoples (including its consolidated subsidiaries) required to be
included in the periodic filings with the Securities and Exchange Commission.
New Peoples' management is also responsible for establishing and maintaining
adequate internal control over financial reporting. There were no changes in New
Peoples' internal control over financial reporting identified in connection with
the evaluation of it that occurred during the last fiscal quarter that
materially affected, or are reasonably likely to materially affect, internal
control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the information required to
be disclosed in this Item 10 is contained in New Peoples' Proxy Statement for
the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information required to
be disclosed in this Item 11 is contained in New Peoples' Proxy Statement for
the 2004 Annual Meeting of Shareholders incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) of Form 10-K, the information required to
be disclosed in this Item 12 is contained in New Peoples' Proxy Statement for
the 2004 Annual Meeting of Shareholders incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, the information required to
be disclosed in this Item 13 is contained in New Peoples' Proxy Statement for
the 2004 Annual Meeting of Shareholders incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Pursuant to General Instruction G(3) of Form 10-K, the information required to
be disclosed in this Item 14 is contained in New Peoples' Proxy Statement for
the 2004 Annual Meeting of Shareholders incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules, 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 (3)
14 Code of Ethics
49
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8K
(Continued)
21 Subsidiaries of the Registrant
31.1 Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification to the Securities and Exchange Commission by Chief
Executive Officer and Chief Financial Officer, as required by Section
906 of the Sarbanes-Oxley Act of 2002.
(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
(3) Incorporated by reference to Exhibits to Form 10-KSB filed by
New Peoples Bankshares, Inc. on March 31, 2003
(b) Reports on Form 8-K. None
(c) Financial statement schedules. The financial statement schedules are
omitted as the required information is inapplicable or the
information is present in the consolidated financial statements or
related notes.
50
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of 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 29, 2004
------------------------------
By: /s/ C. TODD ASBURY
-------------------------------------
C. Todd Asbury
Senior Vice President and Chief
Financial Officer
Date: March 29, 2004
------------------------------
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 and on the dates indicated.
Signature Capacity Date
/s/TIM BALL Director March 29, 2004
-----------------------------
Tim Ball ----------------
/s/JOE CARTER Director March 29, 2004
-----------------------------
Joe Carter ----------------
/s/JOHN D. COX Director March 29, 2004
-----------------------------
John D. Cox ----------------
/s/CHARLES H. GENT Director March 29, 2004
-----------------------------
Charles H. Gent ----------------
/s/HAROLD LYNNE KEENE Director March 30, 2004
-----------------------------
Harold Lynne Keene ----------------
/s/FRANK KILGORE Director March 29, 2004
-----------------------------
Frank Kilgore ----------------
/s/JOHN MAXFIELD Director March 29, 2004
-----------------------------
John Maxfield ----------------
Director
-----------------------------
Michael G. McGlothlin ----------------
/s/FRED MEADE Director March 29, 2004
-----------------------------
Fred Meade ----------------
/s/BILL ED SAMPLE Director March 29, 2004
-----------------------------
Bill Ed Sample ----------------
/s/EARNEST VIRGIL SAMPSON, JR Director March 29, 2004
-----------------------------
Earnest Virgil Sampson, Jr. ----------------
/s/STEPHEN H. STARNES Director March 29, 2004
-----------------------------
Stephen H. Starnes ----------------
/s/PAUL VENCILL, JR. Director March 29, 2004
-----------------------------
Paul Vencill, Jr. ----------------
/s/B. SCOTT WHITE Director March 29, 2004
----------------------------- ----------------
B. Scott White