NEW PEOPLES BANKSHARES INC - Quarter Report: 2005 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2005

For the transition period from              to             

Commission file number: 000-33411

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

(276) 873-7000

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

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  x    No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

7,601,267 shares of common stock, par value $2.00 per share, outstanding as of August 2, 2005

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NEW PEOPLES BANKSHARES, INC.

INDEX

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Part I Financial Information

Item 1 Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

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, 2005 AND 2004

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT SHARE DATA)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(IN THOUSANDS)

(UNAUDITED)

The accompanying notes are an integral part of this statement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS:

New Peoples Bankshares, Inc. (the Company) is a financial 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. In addition, as a member of the Federal Reserve System, the Bank is also subject to regulation by the Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004, the Company established NPB Capital Trust I for the purpose of issuing trust preferred securities.

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, 2005, and the results of operations for the three month and six month periods ended June 30, 2005 and 2004. 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, 2004. The results of operations for the three month and six month periods ended June 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

NOTE 3 ACCOUNTING CHANGE:

In December 1986, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” As permitted, the Company adopted the provisions of this Statement for lending transactions entered into and commitments granted on or after January 1, 2005. Accordingly, loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is generally amortizing these amounts over the contractual life of the related loan.

Before adopting Statement 91, the Company recognized loan origination and commitment fees as income in the period the loan or commitment was granted. The related costs associated with originating those loans and commitments were recognized in salary expense in the period incurred. As a result of adopting Statement 91, as of June 30, 2005 the Company deferred net loan fees (costs) of $135 thousand that would have otherwise been reflected as income, thereby reducing the first six months of 2005 net income by $89 thousand, or $0.01 per share. As of June 30, 2005, approximately $335.1 million, or 79.39% of the loans included in the Company’s financial statements were accounted for under the prior policy.

NOTE 4 INVESTMENT SECURITIES:

The amortized cost and estimated fair value of securities at the dates indicated are as follows:

At June 30, 2005 and December 31, 2004, all securities were classified as available for sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 INVESTMENT SECURITIES (Continued):

The amortized cost and fair value of investment securities at June 30, 2005, 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.

Investment securities with a carrying value of $3.0 million at June 30, 2005 and $3.1 million at December 31, 2004 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 $1.7 million and $1.4 million at June 30, 2005 and December 31, 2004, respectively.

NOTE 5 LOANS:

Loans receivable outstanding are summarized as follows:

The following is a summary of information at June 30, 2005 and December 31, 2004 pertaining to nonperforming assets:

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NOTE 6 ALLOWANCE FOR LOAN LOSSES:

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 COMMON STOCK DIVIDEND AND STOCK OPTIONS:

During the second quarter of 2005, the Board of Directors awarded a 10% stock dividend to shareholders of record on June 7, 2005 which resulted in the issuance of an additional 690,963 shares of common stock. The Board of Directors also elected to apply the 10% stock dividend to stock options outstanding. As a result, stock options increased by 10% per option holder at an exercise price discounted at 110%. Following is a table of the adjusted stock options as affected by the stock dividend.

Amounts presented for prior periods have been adjusted to retroactively reflect the effect of the June 2005 stock dividend on all share and per share amounts.

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 and are determined by the Treasury Method. Amounts presented for prior periods have been adjusted to retroactively reflect the effect of the June 2005 stock dividend on all share and per share amounts.

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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: changes in interest rates and interest rate policies; the ability to successfully manage our growth or implement our growth strategies if we are unable to identify attractive markets, locations or opportunities to expand in the future; maintaining capital levels adequate to support our growth; maintaining cost controls and asset quality 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; 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

During the second quarter of 2005, New Peoples Bankshares, Inc. (the “Company”), which is the parent company of New Peoples Bank, Inc. (the “Bank”), continued its prior pace of growth and subsequent to quarter end reached $500 million in total assets. The Bank opened its 20^th full service branch in Bluefield, Virginia in May.

Net income for the quarter ended June 30, 2005 was $656 thousand, as compared to $1.0 million for the same period ended June 30, 2004. Net income for the first six months of 2005 was $1.3 million as compared to $1.8 million as of June 30, 2004. The decrease in net income for the quarter and the first six months is due primarily to an increased provision for loan losses, trust preferred interest expense, increases in salary and occupancy expenses from expansion, a decrease in the net interest margin, and deferring interest fees and costs over the lives of the loans. Another reason for the decrease is that during the second quarter of 2004, the Company realized a gain on the sale of fixed assets of $185 thousand which was not present in 2005.

During the second quarter of 2005, the Company continued to grow in assets, deposits and loans. At June 30, 2005, total assets increased to $481.8 million, an increase of $44.1 million, or 10.07%, over December 31, 2004. Total deposits grew $42.9 million, or 11.06%, to $431.1 million, and total loans were $422.1 million, an increase of $38.6 million, or 10.05%, from the amounts at December 31, 2004.

In the second quarter of 2005, the Company contracted with UVEST Financial Services, Inc. to provide broker dealer services for NPB Financial Services, Inc. The contract period is for 3 years and is subject to review upon the first year of the contract. Through this affiliation, we expect to provide higher quality financial services to our customers.

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.

Balance Sheet Changes

At June 30, 2005, total assets increased to $481.8 million, an increase of $44.1 million, or 10.07%, over December 31, 2004. This is a result of growth as the new branches opened in 2004 and 2005.

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Loan growth remains strong as total loans increased $38.6 million, or 10.05% to $422.1 million at June 30, 2005 from $383.6 million at December 31, 2004. Asset quality remains strong as discussed in the section Provision for Loan Losses.

We continued to have excellent growth in deposits, which totaled $431.1 million at June 30, 2005, an increase of $42.9 million, or 11.06%, from $388.1 million at December 31, 2004. The increase in deposits is the result of continued growth in the new branches opened in 2004 and 2005. The largest area of deposit growth was in time deposits, which increased $31.5 million, or 11.35%.

Net Interest Income and Net Interest Margin

During the second quarter of 2005, our net interest margin was 4.66% as compared to 5.24% for the same period in 2004. The primary reasons for the decrease are an increase in deposit costs and trust preferred interest expense incurred.

The Company is sensitive to a rise in interest rates that increases the cost of funds. We have experienced an increase in the cost of funds from 1.89% in the second quarter of 2004 to 2.68% in the same quarter of 2005. Interest expense has increased from $1.4 million in the second quarter of 2004 to $2.5 million in the second quarter of 2005. With rising interest rates, and premium rates offered on short-term deposits at new branch locations, we have experienced an increase in interest expenses.

Interest expenses for the first six months of 2005 increased to $4.6 million from $2.8 million for the same period of 2004. The reasons mentioned above for the quarter results are consistent with the year-to-date results as well.

Lastly, we incurred interest expense on trust preferred securities of $163 thousand in the second quarter of 2005 and $315 thousand for the first six months of 2005 as compared to no trust preferred interest expense in the second quarter and first half of 2004. This expense is included in the total interest expenses aforementioned. Trust preferred securities were issued by our wholly owned subsidiary, NPB Capital Trust I in July 2004.

Interest Sensitivity

At June 30, 2005, we had a negative cumulative gap rate sensitivity ratio of 34.76% for the one year re-pricing period, compared to 40.81% at December 31, 2004. The improvement in this ratio positions us better for continued interest rate increases in the future. Generally a negative cumulative gap rate sensitivity ratio indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. On a quarterly basis, management reviews our interest rate risk and has decided that the current position is an acceptable risk for a growing community bank operating in a rural environment.

Provision for Loan Losses

The provision for loan losses was $362 thousand for the second quarter of 2005 compared with $280 thousand for the same period in 2004. For year-to-date June 30, 2005 and 2004, the provision for loan losses was $682 thousand and $400 thousand, consecutively.

The allowance for loan losses was $3.6 million at June 30, 2005 as compared to $3.1 million at December 31, 2004. The ratio of the allowance for loan losses to total loans was .86% at June 30, 2005 and .81% at the end of 2004. Net loans charged-off during the first six months of 2005 were $125 thousand, or .03% of total loans. Based on our evaluation of the loan portfolio, we believe we are adequately reserved for potential loan losses.

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 commenced operations in 1998, we have experienced significant loan growth each year. Although we have experienced lenders who are familiar with their customer base, some of the loans are too new to have exhibited signs of weakness. In addition, recent expansions into new markets increase our credit risk. We consider these factors to create an element of higher risk in the loan portfolio.

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)

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when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any 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 the 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.

A majority of our loans are collateralized by real estate located in our market area. Market values have been and remain stable. It is our policy to sufficiently collateralize loans to minimize loss exposures in case of default. The market area is somewhat diverse, but certain areas are more reliant upon agriculture and coal mining. As a result, increased risk of loan impairments is possible if these industries experience a significant downturn. However, we do not foresee this happening in the near future.

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 loans is performed by the internal loan 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 loan review personnel. Guidance for the evaluation is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.

Due to the risk factors previously mentioned, all loans classified as other assets especially mentioned, substandard, doubtful and loss are individually reviewed for impairment. An evaluation is made to determine if the collateral is sufficient for each of these credits. If an exposure exists, a specific allowance is directly made for the amount of the potential loss, which totaled $19 thousand at June 30, 2005, or .52 % of the allowance for loan losses, as compared to $4 thousand at December 31, 2004, or 0.13% of the allowance for loan losses. In addition, for these credits adequately secured by collateral, a general allocation is made to allow for any inherent risks. 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 need to be made to the allowance for loan losses.

Noninterest Income

Noninterest income decreased to $640 thousand in the second quarter of 2005 from $723 thousand in the second quarter of 2004. The $83 thousand, or 11.48%, decrease is related primarily to the $185 thousand gain on the sale of fixed assets that occurred during the second quarter of 2004. Overdraft fees were increased during the second quarter of 2005 which contributes to the increase of service charges. We anticipate this to continue to increase as volume increases from branch growth.

Noninterest income for the six months ended in 2005 and 2004 was $1.3 million and $1.2 million, respectively. The primary reasons for the increase relate to operational growth from deposit related charges and insurance and investment commissions generated at our subsidiary, NPB Financial Services, Inc.

Noninterest Expense

Noninterest expense increased from $3.3 million for the three months ended June 30, 2004 to $4.1 million for the same period in 2005. The increase was largely due to additional staffing and expenses associated with the new branches opened and the general growth in operations as salaries and benefits increased from $2.0 million to $2.5 million. We expect this number to increase for the remainder of 2005 as we realize a full-year’s effect of staffing for the new branches opened during 2004 and as we continue to add new branch locations. Noninterest expense in the future will depend on our growth and the number of new branch locations.

Noninterest expenses for the first six months of 2005 were $8.0 million as compared to $6.7 million, an increase of $1.4 million, or 20.65%. Salaries and benefits make up the largest portion of this increase. This category of expenses increased $725 thousand, or 17.64%, from $4.1 million to $4.8 million. This increase is related to additional staffing from branches and merit raises.

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Capital

Total capital at the end of the second quarter of 2005 was $37.4 million as compared to $36.1 million at December 31, 2004. The increase is primarily the result of net income for the year. Capital as a percentage of total assets was 7.77% at June 30, 2005 as compared to 8.25% at December 31, 2004, both of which exceeded regulatory requirements.

No cash dividends have been paid historically and none are anticipated in the foreseeable future; however, a 10% stock dividend was awarded to shareholders of record June 7, 2005. The Company’s strategic plan is to continue growing. To accommodate this growth and have sufficient capital, earnings will need to be retained.

Liquidity

At June 30, 2005 and December 31, 2004, we had liquid assets in the form of cash, due from banks and federal funds sold of approximately $22.0 million and $17.4 million, respectively. At June 30, 2005, all of our investments are classified as available-for-sale providing an additional source of liquidity in the amount of $1.9 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 $20.4 million. We may also borrow up to $62.5 million from the Federal Home Loan Bank in which the credit line is secured by a blanket lien on residential real estate loans. As of June 30, 2005, there were no borrowings on these lines of credit. Additional liquidity will be provided by the future growth that management expects in deposit accounts and from loan repayments. We believe that this future growth will result from an increase in market share in our targeted trade area.

Our loan to deposit ratio was 97.93% at June 30, 2005 and 98.83% at year end 2004. 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.

With the lines of credit available and the anticipated deposit growth from new and existing branches, we believe we have adequate liquidity to meet our requirements and needs for the foreseeable future.

Off Balance Sheet Items

There have been no material changes to the off-balance sheet items disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2004.

Contractual Obligations

As of June 30, 2005, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risks faced by the Company since December 31, 2004. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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 on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not operating effectively to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange

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Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. This conclusion was due to the fact, discussed below, that the previously disclosed material weakness in the Company’s internal control over financial reporting at December 31, 2004, stemming from control deficiencies in NPB Financial Services, Inc., a new startup division, had not been fully remediated as of June 30, 2005.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within New Peoples to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Internal Control Over Financial Reporting

In its Form 10-K and 10-K/A for the year ended December 31, 2004, the Company identified a material weakness due to control deficiencies in NPB Financial related to the design effectiveness of certain internal controls regarding segregation of duties in the processes of initiating, authorizing, recording, processing, and reporting certain insurance and brokerage transactions, as well as the design effectiveness of related fraud detection.

Since the discovery of the material weakness in internal control described above, the Company has taken various actions to remediate its internal control in this subsidiary. As previously disclosed, in the first quarter of 2005, the Company made management changes at NPB Financial, improved its process of segregating the function of production of and accounting for sold commissions by having all additional commissions sent directly to the accounting department and changed its recording procedures for sold items by requiring verification with the insurance companies prior to recording.

In the second quarter of 2005, the Company has continued to implement other remedial initiatives it began in the first quarter of 2005, including:

The continued implementation of the initiatives described above is among the Company’s highest priorities. The Company has discussed its corrective actions and future plans with the Audit Committee and Brown, Edwards and, as of the date of this report, the Company believes the actions outlined above should correct the above-listed material weakness in our internal control.

At this time, the Company believes it will have finalized its contracts with insurance companies and substantially finished consolidating its broker-dealer relationships by August 2005, at which time the Company expects to have remediated the material weakness related to NPB Financial. However, the Company cannot predict with certainty when these initiatives will be completed or guarantee that, when completed, these initiatives will in fact eliminate the material weakness. Accordingly, the Company will continue to monitor the effectiveness of its internal control over financial reporting related to NPB Financial and will make any further changes its management determines to be appropriate. Furthermore, the Company cannot assure you that either it or its independent accountants will not in the future identify further material weaknesses or significant deficiencies in the Company’s internal control over financial reporting that have not been discovered to date.

Other than the changes identified above, there have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. The Company expects the remedial changes discussed above to materially affect and improve its 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. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

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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 June 7, 2005. A quorum was present, consisting of a total of 3,544,567 shares, represented in person or by proxy. At the Annual Meeting, the shareholders elected directors to serve until the 2008 Annual Meeting, as follows:

Directors elected to serve until the 2008 Annual Meeting were:

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

Directors continuing to serve until the 2007 Annual Meeting include:

Tim W. Ball

Michael G. McGlothlin

Bill Ed Sample

Paul R. Vencill, Jr.

B. Scott White

No other matters were voted on at the Annual Meeting.

Item 5. Other Information

Not Applicable

Item 6. Exhibits

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

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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.

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