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NEW PEOPLES BANKSHARES INC - Quarter Report: 2004 June (Form 10-Q)

Form 10-Q for period ended June 30, 2004
Table of Contents

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 June 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

(Registrant’s 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 issuer’s classes of common stock, as of the latest practicable date:

 

6,907,569 shares of common stock, par value $2.00 per share,

outstanding as of August 4, 2004

 



Table of Contents

NEW PEOPLES BANKSHARES, INC.

 

INDEX

 

         Page

PART I

  FINANCIAL INFORMATION    2

Item 1.

  Financial Statements     
    Consolidated Statements of Income –Six Months Ended June 30, 2004 and 2003 (Unaudited)    2
    Consolidated Statements of Income – Three Months Ended June 30, 2004 and 2003 (Unaudited)    3
    Consolidated Balance Sheets – June 30, 2004 (Unaudited) and December 31, 2003 (Audited)    4
    Consolidated Statements of Changes in Stockholders’ Equity – Six Months Ended June 30, 2004 and 2003 (Unaudited)    5
    Consolidated Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003    6
    Notes to Consolidated Financial Statements    7

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    10

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    17

Item 4.

  Controls and Procedures    18

PART II

  OTHER INFORMATION    18

Item 1.

  Legal Proceedings    18

Item 2.

  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities    18

Item 3.

  Defaults upon Senior Securities    18

Item 4.

  Submission of Matters to a Vote of Security Holders    18

Item 5.

  Other Information    19

Item 6.

  Exhibits and Reports on Form 8-K    19
   

SIGNATURES

   20

 

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Table of Contents

P art I Financial Information

 

I tem 1 Financial Statements

 

N EW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2004

    2003

INTEREST AND DIVIDEND INCOME

              

Loans including fees

   $ 11,292     $ 9,181

Federal funds sold

     11       80

Investments

     80       210
    


 

Total Interest and Dividend Income

     11,383       9,471
    


 

INTEREST EXPENSE

              

Deposits

              

Demand

     52       51

Savings

     200       231

Time deposits

     2,535       2,981

Other

     3       —  
    


 

Total Interest Expense

     2,790       3,263
    


 

NET INTEREST INCOME

     8,593       6,208

PROVISION FOR LOAN LOSSES

     400       334
    


 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     8,193       5,874
    


 

NONINTEREST INCOME

              

Service charges

     570       396

Fees, commissions and other income

     257       187

Loss on the sale of other real estate owned

     (5 )     —  

Gain on the sale of fixed assets

     185       —  

Life insurance investment income

     198       229
    


 

Total Noninterest Income

     1,205       813
    


 

NONINTEREST EXPENSES

              

Salaries and employee benefits

     4,109       2,876

Occupancy expense

     842       819

Other operating expenses

     1,713       1,181
    


 

Total Noninterest Expenses

     6,664       4,876
    


 

INCOME BEFORE INCOME TAXES

     2,734       1,810

INCOME TAX EXPENSE

     934       605
    


 

NET INCOME

   $ 1,800     $ 1,204
    


 

Earnings Per Share

              

Basic

   $ .26     $ .18
    


 

Fully Diluted

   $ .26     $ .18
    


 

Average Weighted Shares of Common Stock

              

Basic

     6,905,000       6,849,628
    


 

Fully Diluted

     7,019,115       6,919,458
    


 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2004

    2003

INTEREST AND DIVIDEND INCOME

              

Loans including fees

   $ 5,861     $ 4,720

Federal funds sold

     5       52

Investments

     38       66
    


 

Total Interest and Dividend Income

     5,904       4,838
    


 

INTEREST EXPENSE

              

Deposits

              

Demand

     27       26

Savings

     102       123

Time deposits

     1,316       1,448
    


 

Total Interest Expense

     1,445       1,597
    


 

NET INTEREST INCOME

     4,459       3,241

PROVISION FOR LOAN LOSSES

     280       174
    


 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     4,179       3,067
    


 

NONINTEREST INCOME

              

Service charges

     311       214

Fees, commissions and other income

     135       111

Loss on the sale of other real estate owned

     (2 )     —  

Gain on the sale of fixed assets

     185       —  

Life insurance investment income

     94       115
    


 

Total Noninterest Income

     723       440
    


 

NONINTEREST EXPENSES

              

Salaries and employee benefits

     2,032       1,527

Occupancy expense

     424       504

Other operating expenses

     887       576
    


 

Total Noninterest Expenses

     3,343       2,607
    


 

INCOME BEFORE INCOME TAXES

     1,559       899

INCOME TAX EXPENSE

     532       306
    


 

NET INCOME

   $ 1,027     $ 593
    


 

Earnings Per Share

              

Basic

   $ .15     $ .09
    


 

Fully Diluted

   $ .15     $ .09
    


 

Average Weighted Shares of Common Stock

              

Basic

     6,905,569       6,898,003
    


 

Fully Diluted

     7,035,863       6,967,620
    


 

 

The accompanying notes are an integral part of this statement.

 

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Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE DATA)

 

    

June 30,

2004


    December 31,
2003


 
     (Unaudited)

    (Audited)

 

ASSETS

                

Cash and due from banks

   $ 13,053     $ 8,746  

Federal funds sold

     650       3,327  
    


 


Total Cash and Cash Equivalents

     13,703       12,073  

Investment Securities

                

Available-for-sale

     5,784       10,719  

Loans receivable

     347,398       295,438  

Allowance for loan losses

     (2,742 )     (2,432 )
    


 


Net Loans

     344,656       293,006  

Bank premises and equipment, net

     16,183       14,291  

Equity securities (restricted)

     1,790       1,365  

Accrued interest receivable

     2,052       1,896  

Life insurance investments

     8,533       8,359  

Other assets

     1,500       799  
    


 


Total Assets

   $ 394,201     $ 342,508  
    


 


LIABILITIES

                

Deposits:

                

Demand deposits:

                

Noninterest bearing

   $ 39,014     $ 33,296  

Interest-bearing

     21,295       19,802  

Savings deposits

     43,683       40,418  

Time deposits

     241,532       214,705  
    


 


Total Deposits

     345,524       308,221  

Short term borrowings

     11,958       —    

Accrued interest payable

     547       496  

Accrued expenses and other liabilities

     1,553       986  
    


 


Total Liabilities

     359,582       309,703  
    


 


STOCKHOLDERS’ EQUITY

                

Common stock - $2.00 par value; 12,000,000 shares authorized; 6,905,569 and 6,903,003 shares issued and outstanding for June 30, 2004 and December 31, 2003, respectively

     13,811       13,806  

Additional paid-in-capital

     13,091       13,076  

Retained earnings

     7,719       5,919  

Accumulated other comprehensive income/ (loss)

     (2 )     4  
    


 


Total Stockholders’ Equity

     34,619       32,805  
    


 


Total Liabilities and Stockholders’ Equity

   $ 394,201     $ 342,508  
    


 


 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

    Shares of
Common
Stock


  Common
Stock


  Additional
Paid in
Capital


   

Common

Stock

Subscriptions


    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

                              611             611     $ 611  

Common Stock Issued

  885     1,769     7,076       (5,411 )                   3,434          

Cost of Common Stock Offering

              (3 )                           (3 )        

Stock Options Exercised

  5     10     28                             38          
   
 

 


 


 

 


 


 


Balance, June 30, 2003

  6,898   $ 13,796   $ 13,049     $ —       $ 3,716   $  —       $ 30,561     $ 611  
   
 

 


 


 

 


 


 


Balance,
December 31, 2003

  6,903   $ 13,806   $ 13,076     $ —       $ 5,919   $ 4     $ 32,805          

Net Income

                              1,800             1,800     $ 1,800  

Unrealized gains (net of $1 thousand tax) on
available-for-sale securities

                                    (6 )     (6 )     (6 )

Stock Options Exercised

  3     5     15                             20          
   
 

 


 


 

 


 


 


Balance, June 30, 2004

  6,906   $ 13,811   $ 13,091     $ —       $ 7,719   $ (2 )   $ 34,619     $ 1,794  
   
 

 


 


 

 


 


 


 

The accompanying notes are an integral part of this statement.

 

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Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

(IN THOUSANDS)

(UNAUDITED)

 

     2004

    2003

 

CASH FLOWS FROM OPERATING ACTIVITIES

                

Net income

   $ 1,800     $ 1,204  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation

     662       524  

Provision for loan losses

     400       334  

Income (less expenses) on life insurance

     (174 )     (210 )

Loss on sale of foreclosed real estate

     5       —    

Amortization of bond premiums

     34       310  

Gain on the sale of fixed assets

     (185 )     —    

Net change in:

                

Interest receivable

     (156 )     (121 )

Other assets

     (701 )     (267 )

Accrued expense and other liabilities

     567       196  
    


 


Net Cash Provided by Operating Activities

     2,252       1,970  
    


 


CASH FLOWS FROM INVESTING ACTIVITIES

                

Net increase in loans

     (52,050 )     (28,595 )

Purchase of securities held-to-maturity

     —         (18,981 )

Proceeds from sale of securities available-for-sale

     4,914       —    

Proceeds from maturities of securities held-to-maturity

     —         16,000  

Purchase of Federal Reserve Bank stock

     (28 )     (66 )

Purchase of Federal Home Loan Bank stock

     (397 )     (705 )

Payments for the purchase of property

     (3,072 )     (2,054 )

Proceeds from the sale of property

     730       —    
    


 


Net Cash Used in Investing Activities

     (49,903 )     (34,401 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES

                

Net proceeds from common stock offering

     —         3,431  

Common stock options exercised

     20       38  

Proceeds from Federal Home Loan Bank advances

     11,498       —    

Proceeds from federal funds purchased

     460       —    

Net change in:

                

Demand and savings deposits

     10,476       12,685  

Time deposits

     26,827       19,309  
    


 


Net Cash Provided by Financing Activities

     49,281       35,463  
    


 


Net increase (decrease) in cash and cash equivalents

     1,630       3,032  

Cash and Cash Equivalents, Beginning of Period

     12,073       14,939  
    


 


Cash and Cash Equivalents, End of Period

   $ 13,703     $ 17,971  
    


 


Supplemental Disclosure of Cash Paid During the Period for:

                

Interest

   $ 2,739     $ 3,152  

 

The accompanying notes are an integral part of this statement

 

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Table of Contents

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 June 9, 2003, the Company formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.

 

NOTE 2 ACCOUNTING PRINCIPLES:

 

The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2004, and the results of operations for the six and three month periods ended June 30, 2004 and 2003. The notes included herein should be read in conjunction with the notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the six and three month periods ended June 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


June 30, 2004

                           

Available for Sale

                           

U.S. Government Agencies

   $ 5,686    $ 1    $ 6    $ 5,681

Municipal Governments

     101      2      —        103
    

  

  

  

Total Securities AFS

   $ 5,787    $ 3    $ 6    $ 5,784
    

  

  

  

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 June 30, 2004 and December 31, 2003, all securities were classified as available for sale.

 

The amortized cost and fair value of investment securities at June 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.

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 3 INVESTMENT SECURITIES (Continued):

 

(Dollars are in thousands)

 

  

Amortized

Cost


   Fair
Value


  

Weighted

Average

Yield


 

Securities Available for Sale

                    

Due in one year or less

   $ 5,084    $ 5,080    1.341 %

Due after one year through five years

     703      704    2.627 %
    

  

  

Total

   $ 5,787    $ 5,784    1.498 %
    

  

  

 

Investment securities with a carrying value of $3.3 million at June 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 June 30, 2004 and December 31, 2003, respectively.

 

NOTE 4 LOANS:

 

Loans receivable outstanding are summarized as follows:

 

(Dollars are in thousands)

 

   June 30,
2004


   December 31,
2003


Commercial, financial and agricultural

   $ 68,204    $ 58,593

Real estate - construction

     8,640      7,258

Real estate - mortgages

     225,827      185,191

Installment loans to individuals

     44,727      44,396
    

  

Total Loans

   $ 347,398    $ 295,438
    

  

 

The following is a summary of information at June 30, 2004 and December 31, 2003 pertaining to nonperforming loans:

 

(Dollars are in thousands)

 

   June 30,
2004


   December 31,
2003


Principal:

             

Nonaccrual loans

   $ 647    $ 539

Loans past due 90 days or more still accruing interest

     135      26
    

  

Total Loans

   $ 782    $ 565
    

  

 

The following is a summary of information at June 30, 2004 and December 31, 2003 pertaining to impaired loans:

 

(Dollars are in thousands)

 

   June 30,
2004


   December 31,
2003


Impaired loans

   $ 906    $ 331

Valuation allowance

   $ 76    $ 95

Interest income not recognized

   $ 31    $ 2

Average investment in impaired loans

   $ 536    $ 49

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 5 ALLOWANCE FOR LOAN LOSSES:

 

A summary of transactions in the allowance for loan losses are as follows:

 

     For the Three Months
Ended


    For the Six Months
Ended


 

(Dollars are in thousands)

   June 30,
2004


    June 30,
2003


    June 30,
2004


    June 30,
2003


 

Balance, beginning of period

   $ 2,501     $ 2,342     $ 2,432     $ 2,225  

Provision for loan losses

     280       174       400       334  

Recoveries of loans charged off

     3       9       9       15  

Loans charged off

     42       15       99       64  
    


 


 


 


Balance, End of Period

   $ 2,742     $ 2,510     $ 2,742     $ 2,510  
    


 


 


 


Percentage of Loans

     .79 %     1.00 %     .79 %     1.00 %
    


 


 


 


 

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 $9.8 million at June 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 second quarter of 2004, no options to purchase shares of common stock were exercised. At June 30, 2004, the following exercisable options were outstanding.

 

Date of Grant


   Outstanding

   Exercise Price

December 12, 2001

   237,900    $ 7.50

January 1, 2003

   79,500    $ 10.00

January 1, 2004

   86,000    $ 10.00

 

NOTE 8 EARNINGS PER SHARE:

 

Basic earnings per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflects the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options determined by the Treasury Method.

 

NOTE 9 SUBSEQUENT EVENT:

 

On July 7, 2004, the Company completed the issuance of $11.0 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I. The proceeds of the funds 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 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%.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Caution About Forward Looking Statements

 

We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

 

These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including the following: the ability to successfully manage our growth or implement our growth strategies and 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 second quarter of 2004, New Peoples Bankshares, Inc. (the Company), which is the parent company of New Peoples Bank, Inc. (the Bank), experienced both record earnings and asset size. Record quarterly net income for the second quarter 2004 was $1.0 million, or $.15 per share, as compared to a net income for the second quarter of 2003 of $593 thousand, or $.09 per share. Year-to-date net income was also a record high at $1.8 million, or $.26 per share, as compared to $1.2 million, or $.18 per share for the same period in 2003. Total assets were $394.2 million, total loans were $347.4 million and total deposits were $345.5 million. The Company continued to expand in southwestern Virginia by opening a new office in Richlands, Virginia in May 2004.

 

The increase in earnings is due primarily to a strong net interest margin resulting from increased loan production at the branches and a continued decrease in the cost of funds. Net interest margin for the second quarter of 2004 was 5.24% as compared to 4.63% for the period ending June 30, 2003. The annualized return on average equity was 12.08% and 9.72% for the quarters ended June 30, 2004 and 2003, respectively. On a year-to-date basis, the net interest margin was 5.25% as compared to 4.56% as of June 30, 2004 and 2003, respectively. The annualized return on average equity based on year-to-date results was 10.72% as of June 30, 2004 and 10.00% for the same period in 2003.

 

Strong growth in assets, loans, and deposits continued into the second quarter. At June 30, 2004, total assets were $394.2 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 Company’s reputation for quality service.

 

During the second quarter of 2004, the Company continued expanding its branch network by opening a new office in Richlands, Virginia. Additional offices in Bristol and Abingdon, Virginia are expected to open during the third quarter of 2004. With these additions, the branch network will consist of 19 full service offices and one loan production office located throughout southwestern Virginia, southern West Virginia, and eastern Tennessee. In addition, to accommodate the outstanding growth of the Company, a state-of-the-art operations center is under construction and expected to be complete in the fall of 2004 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 are expected to occur in early 2005.

 

Subsequent to the end of the second quarter of 2004, the Company completed an $11.0 million issuance of trust preferred securities, the proceeds of which will be used for general corporate purposes and future growth.

 

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Critical Accounting Policies

 

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. The most critical accounting policy relates to our provision for loan losses, which reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on “Provision for Loan Losses” in this discussion.

 

Net Interest Income and Net Interest Margin

 

Our main source of income is net interest income, or the difference between interest income earned on earning assets and interest expenses on interest bearing liabilities. Net interest margin best indicates how effective we have been in deploying assets and liabilities and pricing strategies.

 

During the second quarter of 2004, we continued to have a very strong net interest margin of 5.24%. This is compared to a net interest margin of 4.63% for the quarter ending June 30, 2003. With recent additions to our lending staff, entry into new markets and a recovering economy, we have witnessed strong loan growth. At the same time, we have consistently decreased our cost of funds. As a result, our net interest margin has significantly improved.

 

Net interest income, which is total interest and dividend income less total interest expense, has continued to increase from $3.2 million for the second quarter of 2003 to $4.5 million for the same period in 2004. Loan income increased to $5.9 million for the second quarter of 2004, or $1.1 million, from $4.7 million for the same period in 2003. The increase is related to the increase in loan volume during the year. Total interest expense was $2.8 million for the quarter ending June 30, 2004 as compared to $3.3 million for the same period in 2003. The $473 thousand decrease is attributed to the lower interest rate environment.

 

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 Six Months Ended

June 30, 2004


   

For the Six Months Ended

June 30, 2003


 
     Average
Balance


    Income/
Expense


   Yields/
Rates


    Average
Balance


    Income/
Expense


  

Yields/

Rates


 

ASSETS

                                          

Loans including fees(1), (2), (3)

   $ 322,607     $ 11,292    7.16 %   $ 237,127     $ 9,181    7.96 %

Federal Funds sold

     2,456       11    .90 %     14,217       80    1.14 %

Other investments

     8,295       80    1.93 %     26,571       210    1.60 %
    


 

        


 

      

Total Earning Assets

     333,358       11,383    6.83 %     277,915       9,471    6.99 %
    


 

        


 

      

Less: Allowance for loans losses

     (2,515 )                  (2,359 )             

Non-earning assets

     37,753                    30,637               
    


              


            

Total Assets

   $ 368,596                  $ 306,193               
    


              


            

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                          

Deposits

                                          

Demand – Interest bearing

   $ 27,652       52    .55 %   $ 16,683       96    1.17 %

Savings

     34,726       200    1.02 %     24,878       186    1.52 %

Time deposits

     227,912       2,535    2.25 %     207,402       2,981    2.92 %

Other borrowings

     4,646       3    .13 %     —                 
    


 

        


 

      

Total interest bearing liabilities

     294,936       2,790    1.91 %     248,963       3,263    2.66 %
    


 

        


 

      

Non-interest bearing deposits

     38,064                    31,814               

Other liabilities

     2,028                    1,329               
    


              


            

Total Liabilities

     335,028                    282,106               

Stockholders’ Equity

     33,568                    24,087               
    


              


            

Total Liabilities and Stockholders’ Equity

   $ 368,596                  $ 306,193               
    


              


            

Net Interest Income

           $ 8,593                  $ 6,208       
            

                

      

Net Yield on Interest Earning Assets

                  5.25 %                  4.56 %
                   

                

Net Interest Spread

                  5.07 %                  4.33 %
                   

                


(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.

 

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Net Interest Margin Analysis

Average Balances, Income and Expense, and Yields and Rates

(In Thousands of Dollars)

 

    

For the Three Months Ended

June 30, 2004


   

For the Three Months Ended

June 30, 2003


 
     Average
Balance


    Income/
Expense


   Yields/
Rates


    Average
Balance


    Income/
Expense


   Yields/
Rates


 

ASSETS

                                          

Loans including fees(1), (2), (3)

   $ 337,754     $ 5,861    7.14 %   $ 245,132     $ 4,720    7.95 %

Federal Funds sold

     2,363       5    .85 %     18,986       52    1.10 %

Other investments

     7,577       38    2.03 %     21,780       66    1.23 %
    


 

        


 

      

Total Earning Assets

     347,694       5,904    6.99 %     285,898       4,838    6.96 %
    


 

        


 

      

Less: Allowance for loans losses

     (2,567 )                  (2,435 )             

Non-earning assets

     39,537                    31,393               
    


              


            

Total Assets

   $ 384,664                  $ 314,856               
    


              


            

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                          

Deposits

                                          

Demand – Interest bearing

   $ 21,107       27    .51 %   $ 10,641       26    .98 %

Savings

     42,701       102    .96 %     33,073       123    1.50 %

Time deposits

     236,215       1,316    2.25 %     210,988       1,448    2.78 %

Other borrowings

     8,420       —      —         —         —      —    
    


 

        


 

      

Total interest bearing liabilities

     308,443       1,445    1.89 %     254,702       1,597    2.54 %
    


 

        


 

      

Non-interest bearing deposits

     39,985                    34,272               

Other liabilities

     2,239                    1,477               
    


              


            

Total Liabilities

     350,667                    290,451               

Stockholders’ Equity

     33,997                    24,396               
    


              


            

Total Liabilities and Stockholders’ Equity

   $ 384,664                  $ 314,847               
    


              


            

Net Interest Income

           $ 4,459                  $ 3,241    4.63 %
            

                

      

Net Yield on Interest Earning Assets

                  5.24 %                  4.63 %
                   

                

Net Interest Spread

                  5.10 %                  4.42 %
                   

                


(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 June 30, 2004. All of our securities are classified as available for sale securities at June 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 Bank’s capital that is subject to the Virginia bank franchise tax. The amount invested fluctuates from period to period depending on the funds available and projected liquidity needs.

 

At June 30, 2004, $3.3 million in securities were pledged for public deposits.

 

Loans

 

We have continued to have strong loan demand as evidenced by an increase in loans in the first six months of 2004 of $52.0 million, or 17.59%, to $347.4 million from $295.4 million at December 31, 2003. Loan growth for the second

 

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quarter of 2004 was $23.4 million, or 7.21%, 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 65.01% of the loan portfolio at June 30, 2004 is secured by real estate.

 

Provision for Loan Losses

 

The provision for loan losses was $400 thousand for the first six months of 2004 compared with $334 thousand for the same period in 2003. A $289 thousand provision for loan losses was made during the second quarter of 2004 as compared to $174 thousand for the second quarter of 2003.

 

The allowance for loan losses was $2.7 million at June 30, 2004 as compared to $2.4 million at December 31, 2003. The ratio of the allowance for loan losses to total loans was .79% at June 30, 2004 and .82% at the end of 2003. Net loans charged off for the first six months of 2004 remained low at $90 thousand, or .03% of average loans, as compared to $49 thousand for first six months of 2003, or .02% of average loans. Net loans charged off during the second quarter of 2004 totaled $39 thousand, or .01% of average loans, as compared to $6 thousand for the second quarter of 2003, or .00% of average loans.

 

The calculation of the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon management’s judgment and analysis. The following factors are evaluated in determining the adequacy of the allowance: risk characteristics of the loan portfolio, current and historical loss experience, concentrations and internal and external factors such as general economic conditions.

 

Certain risk factors exist in the Bank’s loan portfolio. Since the Bank began in 1998, we have experienced significant loan growth each year. Although we 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 June 30, 2004, there were 19 loans in non-accrual status totaling $647 thousand, or 0.19% of total loans. The amount of interest that would have been recognized on these loans in the first half of 2004 was $31 thousand. At June 30, 2004, there were 5 loans greater than 90 days past due and still accruing interest totaling $135 thousand. It is our policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled principal payments or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. Non-accrual loans did not have a significant impact on interest income in any of the periods presented. No loans are classified as troubled debt restructurings as defined by Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings.” There are also no loans identified as “potential problem loans.” We do not have any commitments to lend additional funds to non-performing debtors.

 

Loss experience in the loan portfolio has been minimal. Net loans charged-off over the five year period have not exceeded .08% of average loans in a particular year. In addition, non-performing assets as a percentage of total loans has not exceeded .34%. The trend has been consistent through the current year. We view these as positive indicators of the quality of those loans originated in the early years of the Bank.

 

A majority of the loans are collateralized by real estate located in our market area. 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 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.

 

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Table of Contents

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 $73 thousand at June 30, 2004, or 2.66% of the allowance for loan loss, as compared to $95 thousand on December 31, 2003, or 3.91% of the allowance for loan loss. In addition, for these credits adequately secured by collateral, a general allocation is made to allow for any inherent risks. During the first half 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.

 

Deposits

 

We continued to have strong growth in deposits, which totaled $345.5 million at June 30, 2004, an increase of $37.3 million, or 12.10%, from $308.2 million at December 31, 2003. The increase in deposits is the result of new branches opened in late 2003 and a special 6 month certificate of deposit promotion. The largest areas of growth were in time deposits, which increased $26.8 million, or 12.49%, and demand deposits, which increased $7.2 million, or 13.58%. Savings deposits increased $3.3 million, or 8.08%.

 

Time deposits of $100,000 or more equaled approximately 18.85% of deposits at June 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 balance of and the average rate paid on deposits is shown in the net interest margin analysis.

 

Capital

 

Total capital at June 30, 2004 was $34.6 million as compared to $32.8 million at the end of December 31, 2003. The increase is primarily the result of net income for the quarter. There were 2,566 stock options exercised at $7.50 per share during the first quarter of 2004, but none in the second quarter of 2004. Capital as a percentage of total assets was 8.78% at June 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 Company’s strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained.

 

Trust Preferred Securities

 

Subsequent to the end of the second quarter of 2004, on July 7, 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 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 $723 thousand for the second quarter of 2004 from $440 thousand in 2003. The $283 thousand, or 64.32%, increase is related to an increase in overdraft fees on deposits accounts, insurance commissions and fee income originated by NPB Financial Services, Inc., and a gain on the sale of property totaling $185 thousand. The $185 thousand gain on sale of the fixed asset amounted to 65.4% of the increase in noninterest income for the quarter ended June 30, 2004. Noninterest income as a percentage of average assets (annualized) increased to .75% for the three months ended June 30, 2004 from .59% for the same period in 2004. We anticipate this percentage to increase in 2004 as we increase noninterest income from our new subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc.

 

Noninterest Expense

 

Noninterest expense increased to $3.3 million for the three months ended June 30, 2004 from $2.6 million for the same period 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 $505 thousand from $1.5 million to $2.0 million. We expect this number to increase for the remainder of 2004 as we realize a full-year’s effect of new staffing

 

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Table of Contents

for the new branches opened during 2003 and as we continue to add new branch locations in 2004. Noninterest expense as a percentage of average assets (annualized) increased to 3.48% for the second quarter of 2004 as compared to 3.31% 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 64.51% for the second quarter of 2004 as compared to 70.82% for the same period in 2003. This was lower as the result of increased net interest income and the gain on the sale of property slightly higher as the result of additional staffing during the latter part of 2003 and during the first half of 2004. The ratio of assets to full-time equivalent employees was $1.8 million at the end of the second 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 June 30, 2004, we had 223 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 June 30, 2004 and December 31, 2003, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $13.7 and $12.1 million, respectively. At June 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 June 30, 2004, we had overnight borrowings from the Federal Home Loan Bank totaling $11.4 million. Additional liquidity will be provided by the future growth that management expects in deposit accounts and loan repayments. We believe that this future growth will result from an increase in market share in our targeted trade area. In 2003, we opened four new branches. During 2004, we have opened a new office during the second quarter of 2004 and plan to open two additional branches during the third quarter. 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.

 

Subsequent to quarter end, 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 100.54% at June 30, 2004 and 95.85% at year end 2003. We are 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 June 30, 2004, we had a negative cumulative gap rate sensitivity ratio of 43.50% 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 are being implemented to decrease this risk and improve the position for a rising rate environment. The table set forth below shows our interest sensitivity by period.

 

15


Table of Contents

Interest Sensitivity Analysis

June 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

   $ 67,083     $ 36,566     $ 43,363     $ 51,138     $ 93,906     $ 55,342     $ 347,398

Federal funds sold

     650       —         —         —         —         —         650

Investments

     1,103       5,080       704       —         —         687       7,574

Bank owned life insurance

     8,533       —         —         —         —         —         8,533
    


 


 


 


 


 


 

Total earning assets

   $ 77,369     $ 41,646     $ 44,067     $ 51,138     $ 93,906     $ 56,029     $ 364,155
    


 


 


 


 


 


 

Sources of funds:

                                                      

Interest bearing DDA

   $ 21,295     $ —       $ —       $ —       $ —       $ —       $ 21,295

Savings & MMDA

     43,683       —         —         —         —         —         43,683

Time deposits

     85,148       115,347       32,401       8,636       —         —         241,532

Other borrowings

     11,958       —         —         —         —         —         11,958
    


 


 


 


 


 


 

Total interest bearing liabilities

     162,084       115,347       32,401       8,636       —         —         318,468
    


 


 


 


 


 


 

Discrete Gap

   $ (84,715 )     (73,701 )     11,666       42,502       93,906     $ 56,029     $ 45,687
    


 


 


 


 


 


 

Cumulative Gap

     (84,715 )     (158,416 )     (146,750 )     (104,248 )     (10,342 )     45,687        
    


 


 


 


 


 


     

Cumulative Gap as % of Total Earning Assets

     (23.26 )%     (43.50 )%     (40.30 )%     (28.63 )%     (2.84 )%     12.55 %      

 

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 Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk at June 30, 2004 and December 31, 2003, is as follows:

 

     June 30,
2004


   December 31,
2003


     (In thousands)

Financial instruments whose contract amounts represent credit risk:

             

Commitments to extend credit

   $ 32,056    $ 22,080

Standby letters of credit

     1,510      721

 

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.

 

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not be drawn upon to the total extent to which the Bank is committed.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

The Bank has operating lease obligations for five locations which have not materially changed since December 31, 2003. The leases have varying length terms.

 

The Bank has contractual obligations for various building purchase, construction and renovation projects totaling approximately $1.3 million at June 30, 2004.

 

I tem 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest rate risk represents the primary risk affecting our balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in other interest rates that could affect interest earned on our loan and investment portfolios and interest paid on our deposit accounts.

 

Our policy objective is to monitor our position and to manage our short term and long-term interest rate risk exposure. Our board of directors has established percentages for the maximum potential reductions in net interest income that we are willing to accept, which result from changes in interest rates over the next 12-month period. The percentage limitations relate to instantaneous and sustained parallel changes in interest rates of plus and minus certain basis points as tied to the Wall Street Journal Prime interest rate. This is the more conservative way to model interest rate risk. Management has control over deposit expenses. In a rising rate environment, we may not increase deposit interest rates as quickly as the assets reprice. Accordingly, results may be more favorable than what is reflected in the table below.

 

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 June 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


 
    

June 30,

2004


   

December 31,

2003


       

+300

   (10.06 )%   (1.87 )%   (20.00 )%

+200

   (6.98 )   (1.24 )   (15.00 )

+100

   (3.92 )   (0.62 )   (7.00 )

-100

   4.69     0.60     (7.00 )

-200

   6.34     (3.39 )   (15.00 )

-300

   0.05     (10.25 )   (20.00 )

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the periodic filings with the Securities and Exchange Commission.

 

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 Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

Part II Other Information

 

Item 1. Legal Proceedings

 

In the course of our operations, we may become a party to legal proceedings. We are not aware of any material pending or threatened legal proceedings.

 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

Not Applicable

 

Item 3. Defaults Upon Senior Securities

 

Not Applicable

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The Company held its Annual Meeting of Shareholders on May 26, 2004. A quorum was present, consisting of a total of 3,568,965 shares, represented in person or by proxy. At the Annual Meeting, the shareholders elected directors to serve until the 2007 Annual Meeting, as follows:

 

Directors elected to serve until the 2007 Annual meeting were:

 

     For

   Against

Timothy W. Ball

   3,544,365    24,600

Michael G. McGlothlin

   3,544,365    24,600

Billy Ed Sample

   3,540,765    28,200

Paul R. Vencill, Jr.

   3,543,965    25,000

B. Scott White

   3,544,365    24,600

 

Directors continuing to serve until the 2005 Annual Meeting include:

 

John D. Cox

Charles H. Gent, Jr.

A. Frank Kilgore

Stephen H. Starnes

 

Directors continuing to serve until the 2006 Annual Meeting include:

 

Joe M. Carter

Harold Lynn Keene

John D. Maxfield

Fred W. Meade

E. Virgil Sampson, Jr.

 

No other matters were voted on at the Annual Meeting.

 

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Item 5. Other Information

 

On September 3, 2003, the Company amended Article II, Section I of its articles of incorporation to change the par value of the Company’s common stock from $4.00 par value per share to $2.00 par value per share. The complete text of the Company’s articles of incorporation, as so amended, is filed as Exhibit 3.1 to this report.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

The following exhibits are filed as part of this Form 10-Q, and this list includes the exhibit index:

 

No.

 

Description


3.1   Amended Articles of Incorporation (restated in electronic format as of September 3, 2003).
3.2   Bylaws (restated in electronic format as of March 17, 2004). (1)
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 8-K filed April 15, 2004.

 

(b) Reports on Form 8-K

 

Form 8-K filed April 15, 2004 reporting a change in annual shareholder meeting date and amendment to the Company’s bylaws.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NEW PEOPLES BANKSHARES, INC.

By:

 

/s/ KENNETH D. HART


    Kenneth D. Hart
    President and Chief Executive Officer

Date:

  August 13, 2004

By:

 

/s/ C. TODD ASBURY


    C. Todd Asbury
   

Senior Vice President and

Chief Financial Officer

Date:

  August 13, 2004

 

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