UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2004
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 0-33411
NEW PEOPLES BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia | 31-1804543 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
2 Gent Drive Honaker, Virginia |
24260 | |
(Address of principal executive offices) | (Zip Code) |
(276) 873-6288
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
6,909,569 shares of common stock, par value $2.00 per share,
outstanding as of November 11, 2004
INDEX
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
2004 |
2003 | ||||||
INTEREST AND DIVIDEND INCOME |
|||||||
Loans including fees |
$ | 17,461 | $ | 14,142 | |||
Federal funds sold |
19 | 151 | |||||
Investments |
126 | 280 | |||||
Total Interest and Dividend Income |
17,606 | 14,573 | |||||
INTEREST EXPENSE |
|||||||
Deposits |
|||||||
Demand |
78 | 84 | |||||
Savings |
303 | 342 | |||||
Time deposits |
3,986 | 4,448 | |||||
Federal Funds purchased |
3 | | |||||
Federal Home Loan Bank borrowings |
38 | | |||||
Trust preferred securities |
101 | | |||||
Total Interest Expense |
4,509 | 4,874 | |||||
NET INTEREST INCOME |
13,097 | 9,699 | |||||
PROVISION FOR LOAN LOSSES |
620 | 364 | |||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
12,477 | 9,335 | |||||
NONINTEREST INCOME |
|||||||
Service charges |
924 | 658 | |||||
Fees, commissions and other income |
463 | 332 | |||||
Loss on the sale of other real estate owned |
(11 | ) | | ||||
Gain on the sale of fixed assets |
185 | | |||||
Life insurance investment income |
286 | 315 | |||||
Total Noninterest Income |
1,847 | 1,305 | |||||
NONINTEREST EXPENSES |
|||||||
Salaries and employee benefits |
6,388 | 4,483 | |||||
Occupancy expense |
1,303 | 1,275 | |||||
Other operating expenses |
2,684 | 1,917 | |||||
Total Noninterest Expenses |
10,375 | 7,675 | |||||
INCOME BEFORE INCOME TAXES |
3,948 | 2,965 | |||||
INCOME TAX EXPENSE |
1,308 | 1,000 | |||||
NET INCOME |
$ | 2,640 | $ | 1,965 | |||
Earnings Per Share |
|||||||
Basic |
$ | .38 | $ | .29 | |||
Fully Diluted |
$ | .38 | $ | .28 | |||
Average Weighted Shares of Common Stock |
|||||||
Basic |
6,906,251 | 6,867,047 | |||||
Fully Diluted |
7,020,001 | 6,936,384 | |||||
The accompanying notes are an integral part of this statement.
2
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
2004 |
2003 | ||||||
INTEREST AND DIVIDEND INCOME |
|||||||
Loans including fees |
$ | 6,169 | $ | 4,961 | |||
Federal funds sold |
8 | 71 | |||||
Investments |
46 | 70 | |||||
Total Interest and Dividend Income |
6,223 | 5,102 | |||||
INTEREST EXPENSE |
|||||||
Deposits |
|||||||
Demand |
26 | 33 | |||||
Savings |
103 | 111 | |||||
Time deposits |
1,451 | 1,466 | |||||
Federal Home Loan Bank borrowings |
38 | | |||||
Trust preferred securities |
101 | | |||||
Total Interest Expense |
1,719 | 1,610 | |||||
NET INTEREST INCOME |
4,504 | 3,492 | |||||
PROVISION FOR LOAN LOSSES |
220 | 30 | |||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
4,284 | 3,462 | |||||
NONINTEREST INCOME |
|||||||
Service charges |
354 | 261 | |||||
Fees, commissions and other income |
206 | 144 | |||||
Loss on the sale of other real estate owned |
(6 | ) | | ||||
Life insurance investment income |
88 | 86 | |||||
Total Noninterest Income |
642 | 491 | |||||
NONINTEREST EXPENSES |
|||||||
Salaries and employee benefits |
2,279 | 1,606 | |||||
Occupancy expense |
461 | 456 | |||||
Other operating expenses |
971 | 736 | |||||
Total Noninterest Expenses |
3,711 | 2,798 | |||||
INCOME BEFORE INCOME TAXES |
1,215 | 1,155 | |||||
INCOME TAX EXPENSE |
375 | 394 | |||||
NET INCOME |
$ | 840 | $ | 761 | |||
Earnings Per Share |
|||||||
Basic |
$ | .12 | $ | .11 | |||
Fully Diluted |
$ | .12 | $ | .11 | |||
Average Weighted Shares of Common Stock |
|||||||
Basic |
6,908,727 | 6,901,318 | |||||
Fully Diluted |
7,054,226 | 6,969,685 | |||||
The accompanying notes are an integral part of this statement.
3
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
September 30, 2004 |
December 31, 2003 |
|||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 13,770 | $ | 8,746 | ||||
Federal funds sold |
2,484 | 3,327 | ||||||
Total Cash and Cash Equivalents |
16,254 | 12,073 | ||||||
Investment Securities |
||||||||
Available-for-sale |
5,804 | 10,719 | ||||||
Loans receivable |
366,427 | 295,438 | ||||||
Allowance for loan losses |
(2,840 | ) | (2,432 | ) | ||||
Net Loans |
363,587 | 293,006 | ||||||
Bank premises and equipment, net |
17,940 | 14,291 | ||||||
Equity securities (restricted) |
1,840 | 1,365 | ||||||
Accrued interest receivable |
2,284 | 1,896 | ||||||
Life insurance investments |
8,613 | 8,359 | ||||||
Other assets |
2,440 | 799 | ||||||
Total Assets |
$ | 418,762 | $ | 342,508 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Demand deposits: |
||||||||
Noninterest bearing |
$ | 45,099 | $ | 33,296 | ||||
Interest-bearing |
20,940 | 19,802 | ||||||
Savings deposits |
43,420 | 40,418 | ||||||
Time deposits |
260,185 | 214,705 | ||||||
Total Deposits |
369,644 | 308,221 | ||||||
Accrued interest payable |
748 | 496 | ||||||
Accrued expenses and other liabilities |
1,535 | 986 | ||||||
Trust preferred securities payable |
11,341 | | ||||||
Total Liabilities |
383,268 | 309,703 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock - $2.00 par value; 12,000,000 shares authorized; 6,909,569 and 6,903,003 shares issued and outstanding for September 30, 2004 and December 31, 2003, respectively |
13,819 | 13,806 | ||||||
Additional paid-in-capital |
13,115 | 13,076 | ||||||
Retained earnings |
8,559 | 5,919 | ||||||
Accumulated other comprehensive income/ (loss) |
1 | 4 | ||||||
Total Stockholders Equity |
35,494 | 32,805 | ||||||
Total Liabilities and Stockholders Equity |
$ | 418,762 | $ | 342,508 | ||||
The accompanying notes are an integral part of this statement.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS INCLUDING SHARE DATA)
(UNAUDITED)
Shares of Common Stock |
Common Stock |
Additional Paid in Capital |
Common Stock Sub-scriptions |
Retained Earnings/ (Accumulated Deficit) |
Accumulated Other Comprehensive Income/ (Loss) |
Total Shareholders Equity |
Comprehensive Income |
|||||||||||||||||||||
Balance, December 31, 2002 |
6,008 | $ | 12,017 | $ | 5,948 | $ | 5,411 | $ | 3,105 | $ | | $ | 26,481 | |||||||||||||||
Net Income |
1,965 | 1,965 | $ | 1,965 | ||||||||||||||||||||||||
Common Stock Issued |
885 | 1,769 | 7,076 | (5,411 | ) | 3,434 | ||||||||||||||||||||||
Cost of Common Stock Offering |
(3 | ) | (3 | ) | ||||||||||||||||||||||||
Stock Options Exercised |
10 | 20 | 55 | 75 | ||||||||||||||||||||||||
Balance, September 30, 2003 |
6,903 | $ | 13,806 | $ | 13,076 | $ | | $ | 5,070 | $ | | $ | 31,952 | $ | 1,965 | |||||||||||||
Balance, December 31, 2003 |
6,903 | $ | 13,806 | $ | 13,076 | $ | | $ | 5,919 | $ | 4 | $ | 32,805 | |||||||||||||||
Net Income |
2,640 | 2,640 | $ | 2,640 | ||||||||||||||||||||||||
Unrealized gains (net of tax) on available-for-sale securities |
(3 | ) | (3 | ) | (3 | ) | ||||||||||||||||||||||
Stock Options Exercised |
7 | 13 | 39 | 52 | ||||||||||||||||||||||||
Balance, September 30, 2004 |
6,910 | $ | 13,819 | $ | 13,115 | $ | | $ | 8,559 | $ | 1 | $ | 35,494 | $ | 2,637 | |||||||||||||
The accompanying notes are an integral part of this statement.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 2,640 | $ | 1,965 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
973 | 806 | ||||||
Provision for loan losses |
620 | 364 | ||||||
Income (less expenses) on life insurance |
(254 | ) | (280 | ) | ||||
Loss on sale of foreclosed real estate |
11 | | ||||||
Amortization of bond premiums |
49 | 441 | ||||||
Gain on the sale of fixed assets |
(185 | ) | | |||||
Net change in: |
||||||||
Interest receivable |
(388 | ) | 191 | |||||
Other assets |
(566 | ) | 104 | |||||
Accrued expense and other liabilities |
549 | 641 | ||||||
Net Cash Provided by Operating Activities |
3,449 | 3,642 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Net increase in loans |
(70,581 | ) | (46,447 | ) | ||||
Purchase of securities held-to-maturity |
| (65,964 | ) | |||||
Proceeds from sale of securities available-for-sale |
4,915 | | ||||||
Proceeds from maturities of securities held-to-maturity |
| 58,998 | ||||||
Purchase of Federal Reserve Bank stock |
(58 | ) | (120 | ) | ||||
Purchase of Federal Home Loan Bank stock |
(397 | ) | (705 | ) | ||||
Net change in Other Real Estate Owned |
(1,075 | ) | | |||||
Payments for the purchase of property |
(5,277 | ) | (3,124 | ) | ||||
Proceeds from the sale of property |
730 | | ||||||
Net Cash Used in Investing Activities |
(71,743 | ) | (57,362 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net proceeds from common stock offering |
| 3,431 | ||||||
Common stock options exercised |
52 | 75 | ||||||
Net proceeds from trust preferred securities issuance |
11,000 | | ||||||
Net change in: |
||||||||
Demand and savings deposits |
15,943 | 28,899 | ||||||
Time deposits |
45,480 | 22,262 | ||||||
Net Cash Provided by Financing Activities |
72,475 | 54,667 | ||||||
Net increase (decrease) in cash and cash equivalents |
4,181 | 947 | ||||||
Cash and Cash Equivalents, Beginning of Period |
12,073 | 14,939 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 16,254 | $ | 15,886 | ||||
Supplemental Disclosure of Cash Paid During the Period for: |
||||||||
Interest |
$ | 4,257 | $ | 4,987 |
The accompanying notes are an integral part of this statement.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS:
New Peoples Bankshares, Inc. (the Company) is a bank holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (the Bank) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. As a state chartered bank, the Bank is subject to regulation 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 communities of southwestern Virginia, southern West Virginia, and eastern Tennessee. On September 9, 2003, the Company formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.
NOTE 2 ACCOUNTING PRINCIPLES:
The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2004, and the results of operations for the nine and three month periods ended September 30, 2004 and 2003. The notes included herein should be read in conjunction with the notes to financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the nine and three month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results to be expected for the full year.
The Company does not expect the anticipated adoption of any newly issued accounting standards to have a material impact on future operations or financial position.
NOTE 3 INVESTMENT SECURITIES:
The amortized cost and estimated fair value of securities at the dates indicated are as follows:
(Dollars are in thousands)
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||
September 30, 2004 |
||||||||||||
Available for Sale |
||||||||||||
U.S. Government Agencies |
$ | 5,701 | $ | 1 | $ | | $ | 5,702 | ||||
Municipal Governments |
101 | 1 | | 102 | ||||||||
Total Securities AFS |
$ | 5,802 | $ | 2 | $ | | $ | 5,804 | ||||
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 | ||||
As of September 30, 2004 and December 31, 2003, all securities were classified as available for sale.
The amortized cost and fair value of investment securities at September 30, 2004, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars are in thousands)
|
Amortized Cost |
Fair Value |
Weighted Average Yield |
||||||
Securities Available for Sale |
|||||||||
Due in one year or less |
$ | 5,802 | $ | 5,804 | 1.40 | % | |||
Total |
$ | 5,802 | $ | 5,804 | 1.40 | % | |||
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 INVESTMENT SECURITIES (Continued):
Investment securities with a carrying value of $3.3 million at September 30, 2004 and December 31, 2003 were pledged to secure public deposits and for other purposes required by law.
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading and are recorded at a cost of $1.8 million and $1.4 million at September 30, 2004 and December 31, 2003, respectively.
NOTE 4 LOANS:
Loans receivable outstanding are summarized as follows:
(Dollars are in thousands)
|
September 30, 2004 |
December 31, 2003 | ||||
Commercial, financial and agricultural |
$ | 69,979 | $ | 58,593 | ||
Real estate - construction |
9,921 | 7,258 | ||||
Real estate - mortgages |
240,943 | 185,191 | ||||
Installment loans to individuals |
45,584 | 44,396 | ||||
Total Loans |
$ | 366,427 | $ | 295,438 | ||
The following is a summary of information at September 30, 2004 and December 31, 2003 pertaining to nonperforming loans:
(Dollars are in thousands)
|
September 30, 2004 |
December 31, 2003 | ||||
Principal: |
||||||
Nonaccrual loans |
$ | 512 | $ | 539 | ||
Loans past due 90 days or more still accruing interest |
| 26 | ||||
Total Loans |
$ | 512 | $ | 565 | ||
The following is a summary of information at September 30, 2004 and December 31, 2003 pertaining to impaired loans:
(Dollars are in thousands)
|
September 30, 2004 |
December 31, 2003 | ||||
Impaired loans |
$ | 565 | $ | 331 | ||
Valuation allowance |
$ | 51 | $ | 95 | ||
Interest income not recognized |
$ | 26 | $ | 2 | ||
Average investment in impaired loans |
$ | 606 | $ | 49 |
8
NOTE 5 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses are as follows:
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||
(Dollars are in thousands)
|
September 30, 2004 |
September 30, 2003 |
September 30, 2004 |
September 30, 2003 |
||||||||||||
Balance, beginning of period |
$ | 2,742 | $ | 2,510 | $ | 2,432 | $ | 2,225 | ||||||||
Provision for loan losses |
220 | 30 | 620 | 364 | ||||||||||||
Recoveries of loans charged off |
7 | 2 | 16 | 17 | ||||||||||||
Loans charged off |
129 | 50 | 228 | 114 | ||||||||||||
Balance, End of Period |
$ | 2,840 | $ | 2,492 | $ | 2,840 | $ | 2,492 | ||||||||
Percentage of Loans |
.78 | % | 1.00 | % | .78 | % | 1.00 | % | ||||||||
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 RELATED PARTY LOANS:
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 outstanding principal amounts of $11.6 million at September 30, 2004 and $7.9 million at December 31, 2003. During the year ended December 31, 2003, total principal additions were $12.5 million and principal payments were $11.4 million. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
NOTE 7 COMMON STOCK:
On October 15, 2002, 1,200,000 shares of common stock were offered for sale by means of a prospectus to existing shareholders and to the general public in the states of Virginia, West Virginia and Tennessee only. The sale ended on February 7, 2003, after one 30 day extension from the original sale period. The total number of shares sold under the offering were 890,469.
During the third quarter of 2004, options to purchase 4,000 shares of common stock were exercised. At September 30, 2004, the following exercisable options were outstanding.
Date of Grant |
Outstanding |
Exercise Price | |||
December 12, 2001 |
234,900 | $ | 7.50 | ||
January 1, 2003 |
78,500 | $ | 10.00 | ||
January 1, 2004 |
86,000 | $ | 10.00 |
NOTE 8 EARNINGS PER SHARE:
Basic earnings per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflects the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options determined by the Treasury Method.
NOTE 9 TRUST PREFERRED SECURITIES:
On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I. The proceeds of the funds are being used for general corporate purposes which may include capital management for affiliates, retirement of indebtedness and other investments. Under the terms of the trust preferred transaction, the securities mature in 30 years and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. Due to the ability to defer interest and principal payments for 60 months without being considered in default, the regulatory agencies consider the trust preferred securities as Tier 1 capital. The securities have a floating rate, which will be reset quarterly, with an initial rate of 4.18%.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Caution About Forward Looking Statements
We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words believes, expects, may, will, should, projects, contemplates, anticipates, forecasts, intends, or other similar words or terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including the following: the ability to successfully manage our growth or implement our growth strategies, identify attractive markets, locations or opportunities to expand in the future; maintaining capital levels adequate to support our growth; maintaining cost controls and asset qualities as we open or acquire new branches; reliance on our management team, including our ability to attract and retain key personnel; the successful management of interest rate risk; changes in general economic and business conditions in our market area; changes in interest rates and interest rate policies; risks inherent in making loans such as repayment risks and fluctuating collateral values; competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources; demand, development and acceptance of new products and services; problems with technology utilized by us; changing trends in customer profiles and behavior; and changes in banking and other laws and regulations applicable to us.
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.
Overview
For the third quarter of 2004, New Peoples Bankshares, Inc. (the Company), which is the parent company of New Peoples Bank, Inc. (the Bank), earned $840 thousand, or $.12 per share and reached $418.8 million in total assets. The $840 thousand net income, or $.12 per share for the third quarter 2004 compared favorably to net income for the third quarter of 2003 of $761 thousand, or $.11 per share. Year-to-date net income was $2.6 million, or $.38 per share, as compared to $2.0 million, or $.29 per share for the same period in 2003. Total assets surpassed $400 million in the third quarter and were $418.8 million at the end of the third quarter 2004. Total loans and deposits continued to grow and were $366.4 million and $369.6 million, respectively. The Company continued to expand in southwestern Virginia by opening a new office in Abingdon, Virginia in August 2004. Another office was opened in October 2004 in Bristol, Virginia.
The increase in earnings is due primarily to a strong net interest margin resulting from increased loan production at the branches and sustained cost of funds. Net interest margin for the third quarter of 2004 was 5.06% as compared to 4.62% for the period ending September 30, 2003. The annualized return on average equity was 9.62% and 11.33% for the quarters ended September 30, 2004 and 2003, respectively. On a year-to-date basis, the net interest margin was 5.12% as compared to 4.49% as of September 30, 2004 and 2003, respectively. The annualized return on average equity based on year-to-date results was 10.35% as of September 30, 2004 and 10.47% for the same period in 2003.
Strong growth in assets, loans, and deposits continued into the third quarter. At September 30, 2004, total assets were $418.8 million, an increase of $51.7 million, or 15.09%, over December 31, 2003. Total deposits grew $37.3 million, or 12.10%, to $345.5 million, and total loans were $347.4 million, an increase of $52.0 million, or 17.59%, from the amounts at December 31, 2003. The increase in deposits and loans can be attributed to an increased presence in the market at new and existing branches, the addition of several new loan officers, an improving economy, and the Companys reputation for quality service.
During the third quarter of 2004, the Company continued expanding its branch network by opening a new office in Abingdon, Virginia. Subsequent to quarter end, an additional office was opened in Bristol, Virginia resulting in 19 full service offices and one loan production office located throughout southwestern Virginia, southern West Virginia, and eastern Tennessee. A new operations center is nearly complete and will house bank operations and administration. Renovations are planned for the existing main office of the Company to expand the loan operations department. Future expansions in new markets are expected to occur in early 2005.
Early in the third quarter of 2004, the Company completed an $11.0 million issuance of trust preferred securities, the proceeds of which are being used for general corporate purposes and future growth.
11
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. The most critical accounting policy relates to our provision for loan losses, which reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on Provision for Loan Losses in this discussion.
Net Interest Income and Net Interest Margin
During the third quarter of 2004, we continued to have a very strong net interest margin of 5.06%. This is compared to a net interest margin of 4.62% for the quarter ending September 30, 2003. The loan portfolio continues to grow from additions to our lending staff, new markets and a recovering economy. At the same time, we have maintained a low cost of funds during a rising rate environment. As a result, our net interest margin has significantly improved.
Net interest income continued to increase from $3.5 million for the third quarter of 2003 to $4.5 million for the same period in 2004. Loan income increased to $6.2 million for the third quarter of 2004, or $1.2 million, from $5.0 million for the same period in 2003. The increase is related to the increase in loan volume during the year. Total interest expense was $1.7 million for the quarter ending September 30, 2004 as compared to $1.6 million for the same period in 2003. The $109 thousand increase is attributable primarily to the $101 thousand interest expense on the trust preferred security issuance in July 2004.
The following table shows the rates earned and paid on earning assets and liabilities for the periods indicated.
Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates
(In Thousands of Dollars)
For the Nine Months Ended September 30, 2004 |
For the Nine Months Ended September 30, 2003 |
|||||||||||||||||||
Average Balance |
Income/ Expense |
Yields/ Rates |
Average Balance |
Income/ Expense |
Yields/ Rates |
|||||||||||||||
ASSETS |
||||||||||||||||||||
Loans including fees(1), (2), (3) |
$ | 334,019 | $ | 17,461 | 7.05 | % | $ | 244,679 | $ | 14,142 | 7.77 | % | ||||||||
Federal Funds sold |
2,407 | 19 | 1.06 | % | 19,810 | 151 | 1.02 | % | ||||||||||||
Other investments |
8,061 | 126 | 2.10 | % | 24,847 | 280 | 1.50 | % | ||||||||||||
Total Earning Assets |
344,487 | 17,606 | 6.89 | % | 289,336 | 14,573 | 6.76 | % | ||||||||||||
Less: Allowance for loans losses |
(2,597 | ) | (2,411 | ) | ||||||||||||||||
Non-earning assets |
39,684 | 31,401 | ||||||||||||||||||
Total Assets |
$ | 381,574 | $ | 318,326 | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Deposits |
||||||||||||||||||||
Demand Interest bearing |
$ | 20,895 | 78 | .50 | % | $ | 19,106 | 84 | 0.59 | % | ||||||||||
Savings |
42,048 | 303 | 0.96 | % | 26,318 | 342 | 1.73 | % | ||||||||||||
Time deposits |
234,883 | 3,986 | 2.28 | % | 213,464 | 4,448 | 2.79 | % | ||||||||||||
Fed funds purchased |
162 | 3 | 2.48 | % | | | | |||||||||||||
FHLB borrowings |
3,705 | 38 | 1.37 | % | | | | |||||||||||||
Trust preferred securities |
2,837 | 101 | 4.79 | % | | | ||||||||||||||
Total interest bearing liabilities |
304,530 | 4,509 | 1.98 | % | 258,888 | 4,874 | 2.52 | % | ||||||||||||
Non-interest bearing deposits |
40,838 | 33,006 | ||||||||||||||||||
Other liabilities |
2,212 | 1,404 | ||||||||||||||||||
Total Liabilities |
347,580 | 293,298 | ||||||||||||||||||
Stockholders Equity |
33,994 | 25,028 | ||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 381,574 | $ | 318,326 | ||||||||||||||||
Net Interest Income |
$ | 13,097 | $ | 9,699 | ||||||||||||||||
Net Yield on Interest Earning Assets |
5.12 | % | 4.49 | % | ||||||||||||||||
Net Interest Spread |
4.91 | % | 4.25 | % | ||||||||||||||||
(1) | Non-accrual loans are not significant and have been included in the average balance of loans outstanding. |
(2) | Loan fees are not material and have been included in interest income on loans. |
(3) | Tax exempt income is not significant and has been treated as fully taxable. |
12
Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates
(In Thousands of Dollars)
For the Three Months Ended September 30, 2004 |
For the Three Months Ended September 30, 2003 |
|||||||||||||||||||
Average Balance |
Income/ Expense |
Yields/ Rates |
Average Balance |
Income/ Expense |
Yields/ Rates |
|||||||||||||||
ASSETS |
||||||||||||||||||||
Loans including fees(1), (2), (3) |
$ | 356,595 | $ | 6,169 | 7.14 | % | $ | 259,535 | $ | 4,961 | 7.98 | % | ||||||||
Federal Funds sold |
2,311 | 8 | 1.40 | % | 30,814 | 71 | 0.94 | % | ||||||||||||
Other investments |
5,849 | 46 | 3.20 | % | 21,457 | 70 | 1.33 | % | ||||||||||||
Total Earning Assets |
364,755 | 6,223 | 7.04 | % | 311,806 | 5,102 | 6.80 | % | ||||||||||||
Less: Allowance for loans losses |
(2,761 | ) | (2,513 | ) | ||||||||||||||||
Non-earning assets |
41,213 | 32,903 | ||||||||||||||||||
Total Assets |
$ | 403,207 | $ | 342,196 | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Deposits |
||||||||||||||||||||
Demand Interest bearing |
$ | 21,031 | 26 | .50 | % | $ | 23,873 | 33 | .56 | % | ||||||||||
Savings |
43,030 | 103 | .97 | % | 29,150 | 111 | 1.55 | % | ||||||||||||
Time deposits |
248,674 | 1,451 | 2.37 | % | 225,391 | 1,466 | 2.66 | % | ||||||||||||
Trust preferred securities |
7,455 | 101 | 5.56 | % | | | | |||||||||||||
Other borrowings |
2,324 | 38 | 6.74 | % | | | | |||||||||||||
Total interest bearing liabilities |
322,514 | 1,719 | 2.16 | % | 278,414 | 1,610 | 2.37 | % | ||||||||||||
Non-interest bearing deposits |
43,434 | 35,354 | ||||||||||||||||||
Other liabilities |
2,330 | 1,550 | ||||||||||||||||||
Total Liabilities |
368,278 | 315,318 | ||||||||||||||||||
Stockholders Equity |
34,929 | 26,878 | ||||||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 403,207 | $ | 342,196 | ||||||||||||||||
Net Interest Income |
$ | 4,504 | $ | 3,492 | ||||||||||||||||
Net Yield on Interest Earning Assets |
5.06 | % | 4.62 | % | ||||||||||||||||
Net Interest Spread |
4.88 | % | 4.44 | % | ||||||||||||||||
(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. |
Investment Securities
Total investment securities decreased from $10.7 million at December 31, 2003 to $5.8 million at September 30, 2004. All of our securities are classified as available for sale securities at September 30, 2004 and December 31, 2003.
Our practice has been to invest available funds in short term U.S. Treasury and Agency securities, which reduces the percentage of the Banks capital that is subject to the Virginia bank franchise tax. The amount invested fluctuates from period to period depending on the funds available and projected liquidity needs.
At September 30, 2004, $3.3 million in securities were pledged for public deposits.
Subsequent to quarter end, $5.0 million in investments matured and were reinvested in U. S. Agency securities with the longest maturity being May 2006.
13
Loans
We have continued to have strong loan demand as evidenced by an increase in loans in the first nine months of 2004 of $71.0 million, or 24.03%, to $366.4 million from $295.4 million at December 31, 2003. Loan growth for the third quarter of 2004 was $19.0 million, or 5.47%, from $324.0 million to $347.4 million. The increase results from new branches, additional loan officers and an improved economy. A schedule of loans by type is included in the notes to the financial statements. Approximately 65.75% of the loan portfolio at September 30, 2004 is secured by real estate.
Provision for Loan Losses
The provision for loan losses was $620 thousand for the first nine months of 2004 compared with $364 thousand for the same period in 2003. A $220 thousand provision for loan losses was made during the third quarter of 2004 as compared to $30 thousand for the third quarter of 2003.
The allowance for loan losses was $2.8 million at September 30, 2004 as compared to $2.4 million at December 31, 2003. The ratio of the allowance for loan losses to total loans was .78% at September 30, 2004 and .82% at the end of 2003. Net loans charged off for the first nine months of 2004 remained low at $212 thousand, or .06% of average loans, as compared to $97 thousand for the first nine months of 2003, or .04% of average loans. Net loans charged off during the third quarter of 2004 totaled $122 thousand, or .03% of average loans, as compared to $48 thousand for the third quarter of 2003, or .02% of average loans.
The calculation of the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon managements 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 Banks loan portfolio. Since the Bank began in 1998, we have experienced significant loan growth each year. Although we employ experienced loan officers who are familiar with their customer base, some of our loans are too new to have exhibited signs of weakness. In addition, recent expansions into new markets increase credit risk. We consider these factors to be the primary higher risk characteristics of the loan portfolio.
Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present a higher risk factor. At September 30, 2004, there were 19 loans in non-accrual status totaling $512 thousand, or .14% of total loans. The amount of interest that would have been recognized on these loans in the first nine months of 2004 was $26 thousand. At September 30, 2004, there were no loans greater than 90 days past due and still accruing interest. It is our policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled principal payments or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. Non-accrual loans did not have a significant impact on interest income in any of the periods presented. No loans are classified as troubled debt restructurings as defined by Financial Accounting Standards Boards (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.
A majority of the loans are collateralized by real estate located in our market area. Local real estate 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 is more reliant upon agriculture and coal mining related industries. 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.
All internal and external factors are considered in determining 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.
14
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. The specific allowance totaled $48 thousand at September 30, 2004, or 1.70% of the allowance for loan loss, as compared to $95 thousand on December 31, 2003, or 3.91% of the allowance for loan loss. In addition, for those credits adequately secured by collateral, a general allocation is made to allow for any inherent risks. During the first nine months of 2004, certain loans, based on collateral, were pooled and risk rated differently than the general allocation. As we continue to evaluate the loan portfolio and the risk factors present, we will continue to designate pools as deemed appropriate. We calculate an allowance for the remaining loan portfolio based upon an estimated loan loss percentage. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. As economic conditions and performance of our loans change, it is possible that future increases may be needed to the allowance for loan losses.
Other Real Estate Owned
At the end of the third quarter of 2004, other real estate owned was $1.1 million, or .26% of total assets. This is the result of collecting real estate to satisfy debts of some of the Banks delinquent borrowers. There are no expected losses on any of the properties upon sale.
Deposits
We continued to have strong growth in deposits, which totaled $369.6 million at September 30, 2004, an increase of $61.4 million, or 19.93%, from $308.2 million at December 31, 2003. The increase in deposits is the result of new branches opened in 2004 and a special 6 month certificate of deposit promotion. The largest areas of growth were in time deposits, which increased $45.5 million, or 21.18%, and demand deposits, which increased $12.9 million, or 24.37%. Savings deposits increased $3.0 million, or 7.43%.
Time deposits of $100,000 or more equaled approximately 18.83% of deposits at September 30, 2004 and 18.53% of deposits at December 31, 2003. We do not have brokered deposits, and internet accounts are limited to customers located in the surrounding geographical area. The average balances and the average rates paid on deposits are shown in the net interest margin analysis.
Capital
Total capital at September 30, 2004 was $35.8 million as compared to $32.8 million at the end of December 31, 2003. The increase is primarily the result of net income for the quarter. There have been 5,566 stock options exercised at $7.50 per share, and 1,000 stock options exercised at $10.00 per share during the first nine months of 2004. Capital as a percentage of total assets was 8.48% at September 30, 2004 as compared to 9.58% at December 31, 2003, both of which exceeded regulatory requirements.
No dividends have been paid historically and none are anticipated in the foreseeable future. The Companys strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained.
Trust Preferred Securities
On July 7, 2004, the Company completed the issuance of $11.0 million in trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I.
The proceeds from the sale of the securities are being and will be used for general corporate purposes which may include capital management for affiliates, retirement of indebtedness and other investments. Under the terms of the trust preferred transaction, the securities will mature in 30 years and are redeemable, in whole or in part, without penalty, at the option of the Company after five years. The securities have a floating rate, which will be reset quarterly, with an initial rate of 4.18%.
Noninterest Income
Noninterest income increased to $642 thousand for the third quarter of 2004 from $491 thousand in 2003. The $151 thousand, or 30.75%, increase is related to an increase in overdraft fees on deposit accounts, insurance commissions and fee income originated by NPB Financial Services, Inc. Noninterest income as a percentage of average assets (annualized) increased to .64% for the three months ended September 30, 2004 from .57% for the same period in 2003.
15
Noninterest Expense
Noninterest expense increased to $3.7 million for the three months ended September 30, 2004 from $2.8 million for the same period in 2003. The increase was largely due to additional staffing and expenses associated with the new branches and the general growth in operations as salaries and benefits increased $673 thousand from $1.6 million to $2.3 million. We expect this number to increase for the remainder of 2004 as we realize a full years effect of new staffing for the new branches opened during 2003 and the additional branches in 2004. Noninterest expense as a percentage of average assets (annualized) increased to 3.68% for the third quarter of 2004 as compared to 3.27% for the same period in 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 72.11% for the third quarter of 2004 as compared to 70.25% for the same period in 2003. The ratio was higher in the third quarter of 2004 as a result of the interest expense on the trust preferred securities. As this additional source of capital is further utilized for future growth, we should experience a return on these funds; thus, improving the efficiency ratio and other earnings ratios. The ratio of assets to full-time equivalent employees was $1.8 million at the end of the third quarter of 2004 as compared to $1.7 million at December 31, 2003.
Because we are still in the growth phase, these numbers will remain lower than our peers until we reach a level of maturity, but should continue to improve.
Employees
As of September 30, 2004, we had 232 full-time employees as compared to 194 full-time employees at December 31, 2003. None of our employees is covered by any collective bargaining agreement, and relations with employees are considered excellent.
Liquidity
At September 30, 2004 and December 31, 2003, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $16.3 and $12.1 million, respectively. At September 30, 2004, all of our investments are classified as available-for-sale providing an additional source of liquidity in the amount of $2.5 million, which is net of those securities pledged as collateral for public funds.
In the event we need additional funds, we have the ability to purchase federal funds under established lines of credit totaling $20 million. We may also borrow up to $55.2 million from the Federal Home Loan Bank which borrowings are secured by a blanket lien on residential real estate loans. At September 30, 2004, we had no overnight borrowings from the Federal Home Loan Bank. 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, we opened four new branches. During 2004, we have opened two new offices during the first nine months of 2004. We opened a third new office subsequent to the end of the third quarter. Additional branch locations are anticipated to open during 2005. With the lines of credit available, the increasing deposit growth in the newer branches and deposits anticipated at the new offices to be opened, we believe we have adequate liquidity to meet our requirements and needs.
In July 2004, the Company completed the issuance of $11.0 million in trust preferred securities. The Company used the proceeds to reduce the overnight borrowing position.
With recently increased loan demands, we have taken steps to retain and increase deposits by offering premium rates on short-term deposits. We continue to offer premium rates at our new branches to attract new customers and deposits.
Our loan to deposit ratio was 99.13% at September 30, 2004 and 95.85% at December 31, 2003. We began implementing strategies to increase deposits during the second half of 2004 at both the new 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.
Interest Sensitivity
At September 30, 2004, we had a negative cumulative gap rate sensitivity ratio of 39.65% for the one year re-pricing period, compared to 38.63% at December 31, 2003. This generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. On a quarterly basis, management reviews our interest rate risk and has decided that the current position is an acceptable risk. Strategies have been implemented to decrease this risk, and improvements have been noticed during the third quarter of 2004. The table set forth below shows our interest sensitivity by period.
16
Interest Sensitivity Analysis
September 30, 2004
(In thousands of dollars)
1 - 90 Days |
91-365 Days |
1 - 3 Years |
4-5 Years |
6-15 Years |
Over 15 years |
Total | |||||||||||||||||||||
Uses of funds: |
|||||||||||||||||||||||||||
Loans |
$ | 88,836 | $ | 29,140 | $ | 41,361 | $ | 54,078 | $ | 92,991 | $ | 60,021 | $ | 366,427 | |||||||||||||
Federal funds sold |
2,484 | | | | | | 2,484 | ||||||||||||||||||||
Investments |
6,184 | 807 | | | | 717 | 7,672 | ||||||||||||||||||||
Bank owned life insurance |
8,613 | | | | | | 8,613 | ||||||||||||||||||||
Total earning assets |
$ | 106,081 | $ | 29,947 | $ | 41,361 | $ | 54,078 | $ | 92,991 | $ | 60,738 | $ | 385,196 | |||||||||||||
Sources of funds: |
|||||||||||||||||||||||||||
Interest bearing DDA |
$ | 20,940 | $ | | $ | | $ | | $ | | $ | | $ | 20,940 | |||||||||||||
Savings & MMDA |
43,420 | | | | | | 43,420 | ||||||||||||||||||||
Time deposits |
83,231 | 129,811 | 39,576 | 7,567 | | | 260,185 | ||||||||||||||||||||
Other borrowings |
11,341 | | | | | | 11,341 | ||||||||||||||||||||
Total interest bearing liabilities |
158,932 | 129,811 | 39,576 | 7,567 | | | 335,886 | ||||||||||||||||||||
Discrete Gap |
$ | (52,851 | ) | (99,864 | ) | 1,785 | 46,511 | 92,991 | $ | 60,738 | $ | 49,310 | |||||||||||||||
Cumulative Gap |
(52,851 | ) | (152,715 | ) | (150,930 | ) | (104,419 | ) | (11,428 | ) | 49,310 | ||||||||||||||||
Cumulative Gap as % of Total Earning Assets |
(13.72 | )% | (39.65 | )% | (39.18 | )% | (27.11 | )% | (2.97 | )% | 12.80 | % |
Financial Instruments with Off-Balance Sheet Risk and Credit Risk and Contractual Obligations
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Banks 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 Banks exposure to off-balance sheet risk at September 30, 2004 and December 31, 2003, is as follows:
September 30, 2004 |
December 31, 2003 | |||||
(In thousands) | ||||||
Financial instruments whose contract amounts represent credit risk: |
||||||
Commitments to extend credit |
$ | 34,079 | $ | 22,080 | ||
Standby letters of credit |
1,426 | 721 |
17
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 customers 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 managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Bank is committed.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Bank has operating lease obligations for four locations which have not materially changed since December 31, 2003. The leases have varying length terms.
The Bank has contractual obligations for various building purchase, construction and renovation projects totaling approximately $700 thousand at September 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk represents the primary risk affecting our balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in other interest rates that could affect interest earned on our loan and investment portfolios and interest paid on our deposit accounts.
Our policy objective is to monitor our position and to manage our short term and long-term interest rate risk exposure. Our board of directors has established percentages for the maximum potential reductions in net interest income that we are willing to accept, which result from changes in interest rates over the next 12-month period. The percentage limitations relate to instantaneous and sustained parallel changes in interest rates of plus and minus certain basis points as tied to the Wall Street Journal Prime interest rate. This is the more conservative way to model interest rate risk. Management also has control over deposit expenses. In a rising rate environment, we may not increase deposit interest rates as quickly as the assets reprice. Accordingly, results may be more favorable than what is reflected in the table below.
The following table summarizes our established percentage limitations and the sensitivity of our net interest income to various interest rate scenarios for the next 12 months, based on assets and liabilities as of September 30, 2004 and December 31, 2003. At both dates, our interest rate risk is within the established limitations.
The type of modeling used to generate the table does not take into account all strategies that we might adopt in response to a sudden and sustained change in interest rates. These strategies may include asset liability acquisitions of appropriate maturities in the cash market and may also include off-balance sheet alternatives to the extent such activity is authorized by the board of directors.
Immediate Basis Point Change In Interest Rates |
Estimated Increase (Decrease) in Net Interest Income |
Established Limitation |
|||||||
September 30, 2004 |
December 31, 2003 |
||||||||
+300 |
(8.25 | )% | (1.87 | )% | (20.00 | )% | |||
+200 |
(5.63 | ) | (1.24 | ) | (15.00 | ) | |||
+100 |
(3.04 | ) | (0.62 | ) | (7.00 | ) | |||
-100 |
4.39 | 0.60 | (7.00 | ) | |||||
-200 |
6.53 | (3.39 | ) | (15.00 | ) | ||||
-300 |
0.60 | (10.25 | ) | (20.00 | ) |
18
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic filings with the Securities and Exchange Commission.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in our periodic reports.
The Companys management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Companys internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
In the course of our operations, we may become a party to legal proceedings. We are not aware of any material pending or threatened legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
No matters were voted upon.
None
The following exhibits are filed as part of this Form 10-Q, and this list includes the exhibit index:
No. |
Description | |
3.1 | Amended Articles of Incorporation (restated in electronic format as of September 3, 2003). (1) | |
3.2 | Bylaws (restated in electronic format as of March 17, 2004). (2) | |
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 Exhibit 3.1 to Form 10-Q filed August 13, 2004. |
(2) | Incorporated by reference to Exhibit 3.1 to Form 8-K filed April 15, 2004. |
19
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEW PEOPLES BANKSHARES, INC. | ||
By: |
/s/ KENNETH D. HART | |
Kenneth D. Hart | ||
President and Chief Executive Officer | ||
Date: |
November 15, 2004 | |
By: |
/s/ C. TODD ASBURY | |
C. Todd Asbury | ||
Senior Vice President and Chief Financial Officer | ||
Date: |
November 15, 2004 |
20