Form 10-K
Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended December 31, 2012

Commission File Number 000-33411

 

 

New Peoples Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   31-1804543

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

67 Commerce Drive

Honaker, VA

  24260
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (276) 873-7000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock – $2 Par Value

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15 (d) of the Act.    Yes  ¨    No  x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K Section 229.405 is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” , “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates, based on the last reported sales prices of $1.05 per share on the last business day of the second quarter of 2012 was $9,451,132.

The number of shares outstanding of the registrant’s common stock was 21,870,843 as of March 18, 2013.

DOCUMENTS INCORPORATED BY REFERENCE:

The Proxy Statement for New Peoples Bankshares, Inc’s 2013 Annual Meeting to Shareholders, is incorporated into Items 10 through 14 of this form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I

    

Item 1.

 

Business

     3   

Item 1A.

 

Risk Factors

     12   

Item 1B.

 

Unresolved Staff Comments

     12   

Item 2.

 

Properties

     12   

Item 3.

 

Legal Proceedings

     12   

Item 4.

 

Mine Safety Disclosures

     12   

PART II

    

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     13   

Item 6.

 

Selected Financial Data

     13   

Item 7.

 

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

     14   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     31   

Item 8.

 

Financial Statements and Supplementary Data

     32   

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     67   

Item 9A.

 

Controls and Procedures

     67   

Item 9B.

 

Other Information

     67   

PART III

    

Item 10.

 

Directors, Executive Officers and Corporate Governance

     68   

Item 11.

 

Executive Compensation

     68   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     68   

Item 13.

 

Certain Relationships, Related Transactions and Director Independence

     68   

Item 14.

 

Principal Accounting Fees and Services

     68   

PART IV

    

Item 15.

 

Exhibits, Financial Statement Schedules

     69   

SIGNATURES

       70   


Table of Contents

PART I

 

Item 1. Business

General

New Peoples Bankshares, Inc. (New Peoples) is a Virginia bank holding company headquartered in Honaker, Virginia. Prior to January 1, 2009, New Peoples was a financial holding company. Our business is conducted primarily through New Peoples Bank, Inc., a Virginia banking corporation (the Bank). The Bank has a division doing business as New Peoples Bank Financial Services which offers investment services through its broker dealer relationship with LPL Financial Services, Inc. NPB Insurance Services, Inc. (NPB Insurance) is a subsidiary of the Bank and offers insurance services only.

The Bank offers a range of banking and related financial services focused primarily on serving individuals, small to medium size businesses, and the professional community. We strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Our board of directors believes that marketing customized banking services enables us to establish a niche in the financial services marketplace where we do business.

The Bank is headquartered in Honaker, Virginia and operates 23 full service offices in the southwestern Virginia counties of Russell, Scott, Washington, Tazewell, Buchanan, Dickenson, Wise, Lee, Smyth, and Bland; Mercer County in southern West Virginia and the eastern Tennessee county of Sullivan. The close proximity and mobile nature of individuals and businesses in adjoining counties and nearby cities in Virginia, West Virginia and Tennessee places these markets within our Bank’s targeted trade area, as well.

We provide professionals and small and medium size businesses in our market area with responsive and technologically enabled banking services. These services include loans that are priced on a deposit relationship basis, easy access to our decision makers, and quick and innovative action necessary to meet a customer’s banking needs. Our capitalization and lending limit enable us to satisfy the credit needs of a large portion of the targeted market segment. When a customer needs a loan that exceeds our lending limit, we try to find other financial institutions to participate in the loan with us.

Our History

The Bank was incorporated under the laws of the Commonwealth of Virginia on December 9, 1997 and began operations on October 28, 1998. On September 27, 2001, the shareholders of the Bank approved a plan of reorganization under which they exchanged their shares of Bank common stock for shares of New Peoples common stock. On November 30, 2001, the reorganization was completed and the Bank became New Peoples’ wholly owned subsidiary.

In June 2003, New Peoples formed two new wholly-owned subsidiaries, NPB Financial Services, Inc. (currently named NPB Insurance Services, Inc.) and NPB Web Services, Inc. (NPB Web), a web design and hosting company.

NPB Insurance is a full-service insurance agency, dealing in personal and group life, health, and disability products. However, the Bank, through its division New Peoples Bank Financial services, offers fixed and variable annuities, fee based asset management and other investment products through a broker/dealer relationship with LPL Financial Services, Inc.

NPB Web is inactive.

In July 2004, NPB Capital Trust I was formed to issue $11.3 million in trust preferred securities.

In September 2006, NPB Capital Trust 2 was formed to issue $5.2 million in trust preferred securities.

Branch Locations

After a period of significant branch expansion between 2000 and 2008, we have consolidated some of our branch operations to improve efficiency. Currently, in addition to our headquarters in Honaker, Virginia we have 22 branches located in Abingdon, Virginia; Big Stone Gap, Virginia; Bland, Virginia; Bluefield, Virginia; Bristol, Virginia; Castlewood, Virginia; Chilhowie, Virginia; Clintwood, Virginia; Gate City, Virginia; Grundy, Virginia; Haysi, Virginia; Jonesville, Virginia; Lebanon, Virginia; Norton, Virginia; Pound, Virginia; Pounding Mill, Virginia; Tazewell, Virginia; Weber City, Virginia; Wise, Virginia; Bluewell, West Virginia; Princeton, West Virginia; and Kingsport, Tennessee.

 

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Our Market Areas

Our primary market area consists of southwestern Virginia, southern West Virginia and northeastern Tennessee. Specifically, we operate in the southwestern Virginia counties of Russell, Scott, Washington, Tazewell, Buchanan, Dickenson, Wise, Lee, Smyth, and Bland; Mercer County in southern West Virginia and the eastern Tennessee counties of Sullivan and Washington (collectively, the “Tri-State Area”). The close proximity and transient nature of individuals and businesses in adjoining counties and nearby cities in Virginia, West Virginia and Tennessee place these markets within our bank’s targeted trade area, as well.

Accessibility to Interstates I-77, I-81, I-26, I-64 and I-75 as well as major state and U.S. highways including US 19, US 23, US 58, US 460 and US 421 make the area an ideal location to serve markets in both the East and Mid-America. The area is strategically located midway between Atlanta-Pittsburgh, Charlotte-Cincinnati, and Richmond-Louisville, and is within a day’s drive of more than half of the U.S. population. A regional airport located in Bristol, Tennessee serves the area for commercial flights to and from major cities in the United States. General aviation airports accommodating small jet service include Lonesome Pine Regional Airport, Wise, VA; Lee County Airport, Jonesville, VA; Tazewell County Airport, Claypool Hill, VA; Virginia Highlands Airport, Abingdon, VA; and Mercer County Airport, Bluefield, WV. Rail service providers include CSX Transportation and Norfolk Southern Railways.

The Tri-State Area has a diversified economy supported by natural resources, which include coal, natural gas, limestone, and timber; agriculture; healthcare; education; technology; manufacturing and services industries. Predominantly, the market is comprised of locally owned and operated small businesses. The area has also been named a technology corridor. Considerable investments in high-technology communications, high-speed broadband network and infrastructure have been made which has opened the area to large technology companies and future business development potential for new and existing businesses. The area is becoming known as one of the East Coast’s new centers for electronic information technology, energy, education and emerging specialty manufacturing. Leaders in their industries are taking advantage of the low cost of doing business, training opportunities, available workforce and an exceptional quality of life experience for employers and employees alike.

Internet Site

We have our internet banking site at www.newpeoplesbank.com. The site includes a customer service area that contains branch and ATM locations, product descriptions and current interest rates offered on deposit accounts. Customers with internet access can access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.

Available Information

We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). Our SEC filings are filed electronically and are available to the public over the internet at the SEC’s web site at www.sec.gov. In addition, any document we file with the SEC can be read and copied at the SEC’s public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We also provide a link to our filings on the SEC website, free of charge, through our internet website www.npbankshares.com under “Investor Relations.”

Banking Services

General. We accept deposits, make consumer and commercial loans, issue drafts, and provide other services customarily offered by a commercial bank, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour automated teller machines. The Bank is a member of the Federal Reserve System and its deposits are insured under the Federal Deposit Insurance Act to the maximum limit.

Loans. Generally, we offer a full range of short-to-medium term commercial, 1-4 family residential mortgages and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans may include secured and unsecured loans for financing automobiles, home improvements, education, personal investments and other purposes.

Our lending activities are subject to a variety of lending limits imposed by state law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), in general, the Bank is subject to a loan-to-one borrower limit of an amount equal to 15% of its capital and surplus in the case of loans which are not fully secured by readily marketable or other permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit.

 

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We obtain short-to-medium term commercial and personal loans through direct solicitation of business owners and continued business from existing customers. Completed loan applications are reviewed by our loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow after debt service. Loan quality is analyzed based on the Bank’s experience and its credit underwriting guidelines.

Loans by type as a percentage of total loans are as follows:

 

     December 31,  
     2012     2011     2010     2009     2008  

Commercial, financial and agricultural

     12.61     14.35     15.48     15.56     15.26

Real estate – construction

     4.66     5.42     7.39     9.41     8.96

Real estate – mortgage

     77.09     73.79     69.13     66.02     67.04

Installment loans to individuals

     5.64     6.44     8.00     9.01     8.74
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.00     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself.

Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.

Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities.

Under our underwriting guidelines, residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

Construction Loans. Construction lending entails significant additional risks, compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analysis of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties.

Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans do, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial

 

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collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral.

Our underwriting policy for consumer loans seeks to limit risk and minimize losses, primarily through a careful analysis of the borrower. In evaluating consumer loans, we require our lending officers to review the borrower’s level and stability of income, past credit history and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, we maintain an appropriate margin between the loan amount and collateral value.

Deposits. We offer a variety of deposit products for both individual and business customers. These include demand deposit, interest-bearing demand deposit, savings deposit, and money market deposit accounts. In addition, we offer certificates of deposit with terms ranging from 7 days to 60 months and individual retirement accounts with terms ranging from 12 months to 60 months.

Investment Services. We offer a variety of investment services for both individual and business customers. These services include fixed income products, variable annuities, mutual funds, indexed certificates of deposit, individual retirement accounts, long term care insurance, employee group benefit plans, college savings plans, financial planning, managed money accounts, and estate planning. We offer these services through our broker-dealer relationship with LPL Financial Services, Inc.

Other Bank Services. Other bank services include safe deposit boxes, cashier’s checks, certain cash management services, direct deposit of payroll and social security checks and automatic drafts for various accounts. We offer ATM card services that can be used by our customers throughout Virginia and other regions. We also offer MasterCard and VISA credit card services through an intermediary. Electronic banking services include debit cards, internet banking, telephone banking and wire transfers.

We do not presently anticipate exercising trust powers, but we are able to provide similar services through our affiliation with LPL Financial Services, Inc.

Competition

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the southwestern Virginia, southern West Virginia, and eastern Tennessee market area and elsewhere. Our market area is a highly competitive, highly branched banking market.

Competition in the market area for loans to small businesses and professionals, the Bank’s target market, is intense, and pricing is important. Many of our larger competitors have substantially greater resources and lending limits than we have. They offer certain services, such as extensive and established branch networks and trust services that we do not expect to provide or will not provide in the near future. Moreover, larger institutions operating in the market area have access to borrowed funds at lower costs than are available to us. Deposit competition among institutions in the market area also is strong. As a result, it is possible that we may pay above-market rates to attract deposits.

While pricing is important, our principal method of competition is service. As a community banking organization, we strive to serve the banking needs of our customers while developing personal, hometown relationships with them. As a result, we provide a significant amount of service and a range of products without the fees that customers can expect from larger banking institutions.

According to a market share report prepared by the Federal Deposit Insurance Corporation (the FDIC), as of June 30, 2012, the most recent date for which market share information is available, the Bank’s deposits as a percentage of total deposits in its major market areas were as follows: Russell County, VA – 27.98%, Scott County, VA – 35.52%, Dickenson County, VA – 27.93%, Tazewell County, VA – 8.52%, Smyth County, VA – 2.83%, Lee County, VA – 5.24%, Buchanan County, VA – 8.24%, Wise County, VA – 7.90%, City of Norton, VA – 14.15%, Bland County, VA – 24.58%, Washington County, VA – 2.65%, and the City of Bristol, VA – 2.33%, Mercer County, WV – 8.38%, and City of Kingsport, TN – 1.37%.

 

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Employees

As of December 31, 2012, we had 293 total employees, of which 278 were full-time employees. None of our employees are covered by a collective bargaining agreement, and we consider relations with employees to be excellent.

Supervision and Regulation

General. As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). We are also subject to Chapter 13 of the Virginia Banking Act, as amended (“Virginia Act”). As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions (“BFI”). As a member of the Federal Reserve system, the Bank is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer protection and compliance laws, govern the activities of the Bank, such as the investments that it makes and the aggregate amount of loans that it may grant to one borrower.

The following description summarizes the most significant federal and state laws applicable to New Peoples and its subsidiaries. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.

The Bank Holding Company Act. Under the BHCA, the Federal Reserve examines New Peoples periodically. New Peoples is also required to file periodic reports and provide any additional information that the Federal Reserve may require. Activities at the bank holding company level are generally limited to:

 

   

banking, managing or controlling banks;

 

   

furnishing services to or performing services for its subsidiaries; and

 

   

engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.

Thus, the activities we can engage in are restricted as a matter of law.

With some limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

   

acquiring substantially all the assets of any bank;

 

   

acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or

 

   

merging or consolidating with another bank holding company.

As a result, our ability to engage in certain strategic activities is conditioned on regulatory approval.

In addition, and subject to some exceptions, the BHCA and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company as defined in the statutes and regulations. These requirements make it more difficult for control of our company to change.

The Virginia Act. As a bank holding company registered with the BFI, we must provide the BFI with information concerning our financial condition, operations and management, among other reports required by the BFI. New Peoples is also examined by the BFI in addition to its Federal Reserve examinations. Similar to the BHCA, the Virginia Act requires that the BFI approve the acquisition of direct or indirect ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company like us.

Payment of Dividends. New Peoples is a separate legal entity that derives the majority of its revenues from dividends paid to it by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the

 

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payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. In October 2009, the Federal Reserve Bank of Richmond (“Richmond FRB”) restricted the Company from paying dividends without prior approval. It is therefore highly unlikely that the Company will pay any dividends at least until the Richmond FRB’s restriction is removed.

As the recession continues to impact asset quality and earnings at financial institutions as the above discussion states, the regulatory authorities have broad discretion to, and may, further restrict the payment of dividends by affected financial institutions and this could impact us.

Capital Requirements. The Federal Reserve has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, the Bank and the Company are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of “Tier 1 Capital”, which is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles. The remainder may consist of “Tier 2 Capital”, which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the loan loss allowance. These risk-based capital standards attempt to measure capital adequacy relative to the institution’s risk profiles. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets of between 3% and 5%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. The principal objective of the leverage ratio is to constrain the degree to which an institution may leverage its equity capital base. In sum, the capital measures used by the federal banking regulators are:

 

   

the Total Capital ratio, which is the total of Tier 1 Capital and Tier 2 Capital;

 

   

the Tier 1 Capital ratio; and

 

   

the leverage ratio.

Under these regulations, a bank will be:

 

   

“well capitalized” if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;

 

   

“adequately capitalized” if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater – or 3% in certain circumstances – and is not well capitalized;

 

   

“undercapitalized” if it has a Total Capital ratio of less than 8%, a Tier 1 Capital ratio of less than 4% – or 3% in certain circumstances;

 

   

“significantly undercapitalized” if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage ratio of less than 3%; or

 

   

“critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets,

The risk-based capital standards of the Federal Reserve explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered as a factor in evaluating a banking organization’s capital adequacy. Thus, the capital level of a bank can be of regulatory concern even if it is “well-capitalized” under the regulatory formula and a “well-capitalized” bank can be required to maintain even higher capital levels based on its asset quality or other regulatory concerns.

 

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The regulators may take various corrective actions with respect to a financial institution considered to be capital deficient. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid or dividends, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. As discussed above, in October 2009 the Richmond FRB imposed a prohibition on the Bank paying dividends to preserve capital. Bank holding companies can be called upon to boost their subsidiary bank’s capital and to partially guarantee the institution’s performance under its capital restoration plan. If this occurs, capital which otherwise would be available for holding company purposes, including possible distributions to shareholders, would be required to be downstreamed to one or more subsidiary bank. In this respect, the Richmond FRB also notified New Peoples that we must defer dividends on our trust preferred issuances which we did as of October 2009. As of December 31, 2012, the Bank was “well capitalized,” with a Total Capital ratio of 12.88%; a Tier 1 Capital ratio of 11.60%; and a leverage ratio 7.08%.

In addition, under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity and more complex risk-weightings of assets. In addition, these requirements are likely to substantially increase the Company’s compliance costs and cause the Company’s capital accounts to become more variable. At this point, the U.S. banking regulators have not decided whether, or to what extent, the Basel III requirements will apply to community banks like the Company.

Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on bank holding companies and their bank subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, the Federal Reserve requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. These requirements can restrict the ability of bank holding companies to deploy their capital as they otherwise might.

Interstate Banking and Branching. Banks in Virginia may branch without geographic restriction. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Bank holding companies may acquire banks in any state without regard to state law except for state laws requiring a minimum time a bank must be in existence to be acquired. The Virginia Act generally permits out of state bank holding companies or banks to acquire Virginia banks or bank holding companies subject to regulatory approval. These laws have the effect of increasing competition in banking markets.

Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of unsettled conditions in the national and international economy and money markets, as well as governmental fiscal and monetary policies their impact on interest rates, deposit levels, loan demand or the business and earnings of the Bank is unpredictable.

Federal Reserve System. Depository institutions that maintain transaction accounts or nonpersonal time deposits are subject to reserve requirements. These reserve requirements are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.

Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. These provisions restrict the amount and provide conditions with respect to loans, investments, transfers of assets and other transactions between New Peoples and the Bank.

Loans to Insiders. The Bank is subject to rules on the amount, terms and risks associated with loans to executive officers, directors, principal shareholders and their related interests.

 

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Community Reinvestment Act. Under the Community Reinvestment Act, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act emphasizes the delivery of bank products and services through branch locations in its market areas and requires banks to keep data reflecting their efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA (see below) may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” rating in its latest Community Reinvestment Act examination. The Bank received a rating of “Satisfactory” at its last Community Reinvestment Act performance evaluation, as of August 8, 2011.

Other Laws. Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs to financial institutions and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (“GLBA”) covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies.

For example, the GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become financial holding companies, which can engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment, merchant banking, insurance underwriting, sales and brokerage activities. In order to become a financial holding company, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. We converted to bank holding company status on January 1, 2009 from “financial holding company.” We believe we adequately provide the products and services our customers currently need or want as a bank holding company.

Essentially GLBA removed many of the limitations on affiliations between commercial banks and their holding companies and other financially related business that had been in place since the Depression. Recently, this effect of GLBA has been the subject of controversy and cited as one of the causes of the financial services crisis. As a result, The Dodd-Frank Act (as discussed later) addressed some of the criticized aspects of GLBA, but not in a way that would materially affect us.

The GLBA also provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities.

USA Patriot Act. The USA Patriot Act provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Regulatory authorities must consider the effectiveness of a financial institution’s anti-money laundering activities, for example, its procedures for effective customer identification, when reviewing bank mergers and acquisitions. Various other laws and regulations require the Bank to cooperate with governmental authorities in respect to counter-terrorism activities. Although it does create a reporting obligation and cost of compliance for the Bank, the USA Patriot Act has not materially affected New Peoples’ products, services or other business activities.

Privacy and Fair Credit Reporting. Financial institutions, such as the Bank, are required to disclose their privacy policies to customers and consumers and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. The Bank also requires business partners with whom it shares such information to assure the Bank that they have adequate security safeguards and to abide by the redisclosure and reuse provisions of applicable law. In addition to adopting federal requirements regarding privacy, individual states are authorized to enact more stringent laws relating to the use of customer information. To date, Virginia has not done so. These privacy laws create compliance obligations and potential liability for the Bank.

 

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Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) is intended to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by the Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively.

The Sarbanes-Oxley Act generally applies to all domestic companies, such as New Peoples, that file periodic reports with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended. The Sarbanes-Oxley Act includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has adopted extensive additional disclosures, corporate governance provisions and other related rules pursuant to it. New Peoples has expended, and will continue to expend, considerable time and money in complying with the Sarbanes-Oxley Act.

Emergency Economic Stabilization Act of 2008. EESA was enacted in response to the financial crises affecting the banking system and financial markets.

Pursuant to EESA, the Department of the Treasury implemented the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”) under which the Treasury agreed to make $250 billion of capital available to U.S. financial institutions in the form of preferred stock (from the $700 billion authorized by the EESA). Numerous requirements have been imposed on TARP participating financial institutions, particularly requirements related to executive compensation. We did not elect to apply to participate in TARP.

Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Deposit insurance Fund, as administered by the FDIC, to the maximum amount permitted by law. In October 2008, deposits at FDIC-insured institutions temporarily became insured up to at least $250,000 per depositor. The Dodd-Frank Act passed in 2010 made this increase permanent. In addition, it provides for unlimited federal deposit insurance until December 31, 2012 for non-interest bearing transaction accounts at all insured depository institutions. Due to the increased number of bank failures resulting from the credit crisis and severe recession, FDIC premiums have materially increased and are likely to increase further. This is a significant expense for us and is likely to continue to be.

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impact the Company is the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility formerly handled by other banking regulators is consolidated in the CFPB. It will also oversee the enforcement of all federal laws intended to ensure fair access to credit. For smaller financial institutions such as the Company and the Bank, the CFPB will coordinate its examination activities through their primary regulators.

The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. In addition, the Federal Reserve has issued new rules that have the effect of limiting the fees charged to merchants for debit card transactions. The result of these rules will be to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

Although the Dodd-Frank Act provisions themselves are extensive, the ultimate impact on the Company of this massive legislation is unknown. The Act provides that several federal agencies, including the Federal Reserve and the Securities and Exchange Commission, shall issue regulations implementing major portions of the legislation, and this process is ongoing.

Future Regulatory Uncertainty. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated and that additional laws or regulations may be adopted further regulating specific banking practices.

Subsequent Events

We have considered subsequent events through the date of the financial statements in this Form 10-K.

 

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Item 1A. Risk Factors

Not applicable.

 

Item 1B. Unresolved Staff Comments

Not applicable.

 

Item 2. Properties

At December 31, 2012, the Company’s net investment in premises and equipment in service was $31.2 million. Our main office and operations center is located in Honaker, Virginia. This location contains a full service branch, and our administration and operations center.

The Bank owns all of its 23 full service branches, including its headquarter office. The location of these branches are described in Item 1.

The Bank owns a location in Dungannon, Virginia that half of the location was used for a branch location until its closure during 2010. The other half of the location is currently being leased. The Bank owns additional property in Princeton, West Virginia that is being developed for a future full service branch location, and currently serves as a loan administration office. The Princeton location is anticipated to operate as a full service branch in the distant future. During 2012, the Bank closed offices in Bristol, Pennington Gap, and Richlands, Virginia and Jonesborough, Tennessee. The Bristol office will be leased to the Bank’s subsidiary NPB Insurance Services, Inc. in 2013. The Pennington Gap property was sold in January 2013. The other two offices are vacant and may be used for future banking offices again in the future when the economy recovers.

We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.

 

Item 3. Legal Proceedings

In the course of operations, we may become a party to legal proceedings. We became aware of a lawsuit against the Bank in April 2010. This case involves a claim against the Bank by a joint venture between Bank customers, some of whom are former members of senior management, and three investors. The allegation is that the joint venture, VFI, should have priority over the Bank’s deed of trust in order for VFI’s unrecorded and unrecordable ground lease to be enforceable for its full ten year term. There are also additional claims for damages resulting from allegations that the Bank’s representatives imputed liability to the Bank based upon breach of fiduciary duty, fraud, and collaboration. The parties agreed to litigate the ground lease issue first and are now in negotiations to resolve all pending issues due to the fact that the business associated with the building has ceased and the building is vacant. Attempts to mediate this matter have been unsuccessful and a pretrial hearing is set for April 2013. Management and Bank’s counsel believe VFI’s position is not supported by law or the facts presented.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Market Information

Registrar and Transfer Company is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the Over The Counter Bulletin Board (OTCBB) under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically small volumes of stock is traded.

The high and low prices at which our common stock has traded known to us for each quarter in the past two years are set forth in the table below. These prices are obtained through inquiry of shareholders transferring stock and by our listing on the OTCBB. Other transactions may have occurred at prices about which we are not aware.

 

     2012      2011  
     High      Low      High      High  

1st quarter

   $ 3.00       $ 1.50       $ 10.00       $ 4.00   

2nd quarter

     1.50         1.05         5.00         5.00   

3rd quarter

     5.00         1.07         3.00         3.00   

4th quarter

     1.50         1.07         3.00         3.00   

The most recent sales price of which management is aware was $1.51 per share on March 8, 2013.

 

(b) Holders

On March 18, 2013, there were approximately 4,476 shareholders of record.

 

(c) Dividends

In order to preserve capital to support our growth in the past we have not paid cash dividends. The declaration of dividends in the future will depend on our earnings and capital requirements and compliance with regulatory mandates. We are subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Moreover, the Written Agreement we have with the banking regulators prohibits the Company from paying any cash dividends and the Bank’s ability to pay dividends to the Company. So long as these restrictions remain in place the Company will not pay any cash dividends. Thereafter, the Company may or may not pay cash dividends depending on various factors including capital needs, earnings, and other factors our Board of Directors deems relevant. As a result, we do not anticipate paying a dividend on our common stock in 2013. See Note 3, Note 16 and Note 22 of the Notes to the Consolidated Financial Statements for further discussion of dividend limitations and capital requirements.

Item 6. Selected Financial Data

Not applicable.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking statements in this annual report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include:

 

   

the success or failure of our efforts to implement our business plan;

 

   

achieving and maintaining compliance with the Written Agreement between us and the banking regulators;

 

   

any required increase in our regulatory capital ratios;

 

   

satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;

 

   

any substantial increase in nonperforming loans;

 

   

our ability to attract additional talent that we may need;

 

   

any required increase to our loan loss reserve;

 

   

the difficult market conditions in our industry;

 

   

the unprecedented levels of market volatility;

 

   

the effects of soundness of other financial institutions;

 

   

the uncertain outcome of recently enacted legislation to stabilize the U.S. financial system;

 

   

the potential impact on us of recently enacted legislation;

 

   

the lack of a market for our common stock;

 

   

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;

 

   

success in increasing capital to support our financial condition resulting from the recession;

 

   

in the near future, achieving the cost savings we project without customer rejection as we close unprofitable branches, and, in the longer term maintaining cost controls and asset qualities as we open or acquire new branches;

 

   

the successful management of interest rate risk;

 

   

changes in interest rates and interest rate policies;

 

   

reliance on our management team, including our ability to attract and retain key personnel;

 

   

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;

 

   

changes in governmental regulations, tax rates and similar matters; and

 

   

other risks which may be described in our future filings with the SEC.

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. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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General

The following commentary discusses major components of our business and presents an overview of our consolidated financial position at December 31, 2012 and 2011 as well as results of operations for the years ended December 31, 2012 and 2011. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.

New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank’s interest expense is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccrual loans and the amount of additions to the allowance for loan losses. The Bank also generates noninterest income from service charges on deposit accounts and commissions on insurance and investment products sold.

Written Agreement

The Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions. Under this Agreement, the Bank has agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, which has been done.

The Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Agreement, the Company and the Bank have appointed a committee to monitor compliance. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

Written Agreement Progress Report

At December 31, 2012, we believe we have not yet achieved full compliance with the Agreement but we have made progress in our compliance efforts under the Agreement. We are aggressively working to comply with the Agreement and have timely submitted each required plan by its respective deadline. We have hired an independent consultant to assist us in these efforts and the following actions have taken place:

 

  1. With regard to corporate governance, we have established a weekly Director’s Loan Committee to oversee all loan approvals and all loan renewals, extensions and approvals for loans risk rated Special Mention or worse, as well as, exposures exceeding the Chief Credit Officer’s lending authority. This has enabled the Board to increase its oversight of the Bank’s largest credit exposures and problem credits, and enhanced the monitoring and compliance with all loan policies and procedures. Secondly, we have enhanced our reporting of credit quality to the board. Furthermore, we have adopted formal charters for our Nominating, Compliance, Compensation, and Loan Committees. A corporate governance policy was adopted by the Board of Directors on April 23, 2012.

 

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  2. The requirement to assess the Board and management has been completed by an independent party. A report has been issued to the Board and recommendations are being followed. In September 2010, our President and CEO was added as a member of the Board and in November 2010, Eugene Hearl was added as a member of the Board. Mr. Hearl has over 40 years banking experience as President and CEO for two community banks and Regional President of a large regional financial institution.

In addition, training is a key initiative of both the Board of Directors and employees. Further training of the Board and employees has been implemented and will be ongoing.

A formal management succession plan has been developed and approved by the Board of Directors.

 

  3. In the month of September 2010, a newly revised strategic plan and a capital plan were completed and submitted to our regulators. The 2011 Budget was submitted to our regulators in the fourth quarter of 2010. The 2012 Budget was submitted to our regulators also in the fourth quarter of 2011. The 2013 Budget was submitted to our regulators in January 2013.

A newly revised strategic plan for the years 2013 through 2015 was completed and submitted to the regulators in January 2013.

In September 2012, we converted notes payable to two of our directors totaling $5.5 million plus accrued interest of $272 thousand to common stock. As a result of the conversion, New Peoples returned to well capitalized status at September 30, 2012.

In accordance with our capital plan, we began a common stock offering in July 2012 to existing shareholders followed by an offering to the public during the third and fourth quarters of 2012. The offering was closed on December 20, 2012 and proceeds of $12,061,257 were received on December 28, 2012. Upon receipt of the proceeds we injected $7.0 million of capital into the Bank. The remaining net proceeds are held at the Company and will be used for payment of operating expenses and, when permitted by regulatory authorities, the payment of deferred trust preferred interest. The remaining additional cash may be used for future capital injections, if needed; thus, providing a source of strength at the holding company level for the Bank. In addition, the conversion of the director notes to common stock and the recent stock offering included common stock warrants that may be exercised in the next five years and potentially provide additional capital if, and when, they are exercised. A total of 2,370,900 common stock warrants were outstanding as of December 31, 2012 with an exercise price of $1.75. Assuming all of these warrants are exercised before expiration, then an additional $4.1 million in capital would be provided by their exercise.

 

  4. Loan policies have been revised; an online approval and underwriting system for loans has been implemented; underwriting, monitoring and management of credits and collections have been enhanced; frequency of external loan reviews increased; and the focus on problem loans intensified at all levels in the organization. As a result, we are more timely in identifying problem loans. In the future, continuing these procedures should strengthen asset quality substantially. Further training of lending personnel is ongoing regarding proper risk grading of credits and identification of problem credits.

 

  5. Enhanced loan concentration identification and new procedures for monitoring and managing concentrations have been implemented. Loan concentration targets have been established and efforts continue to reduce higher risk concentrations. In particular, construction and development loans and commercial real estate loans have been reduced and continue to decrease toward acceptable levels as determined by the new policies.

 

  6. To strengthen management of credit quality and loan production, we added a new Chief Credit Officer, Stephen Trescot, in the first quarter of 2011 who brings vast credit administration experience to our management team. Sharon Borich, our former Chief Credit Officer, assumed the role of Senior Lending Officer with oversight of loan production and business development which is her area of expertise. In addition to new lending policies and procedures, the management of all real estate development projects and draws has been centralized. We have segregated the duties of lenders for greater specialization of commercial and retail lending responsibilities. As a result we have formed a Commercial Loan division that is supervised by the Senior Vice President and Senior Lending Officer. The retail loans are primarily the responsibility of branch personnel who report to branch managers and respective area managers.

In the fourth quarter of 2012, a Senior Vice President and Senior Credit Officer was added to the credit administration function providing additional management experience to the credit function. Karen Wimmer reports directly to Chief Credit Officer Trescot and oversees the credit administration area of the Bank

 

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The credit analysis function has been restructured and is a part of credit administration. The credit analysis function is led by a Vice President/Senior Analyst, who supervises three analysts, of which, two analysts are CPA’s, the third has an MBA. The function reports directly to the Senior Vice President and Senior Credit Officer and is responsible for analyzing new and renewed loan relationships of $250 thousand or more prior to approval and conducting annual financial reviews of loan relationships of $500 thousand or more.

The appraisal review function, consisting of two Vice Presidents, one of which is an experienced licensed appraiser, and one administrative assistant, also reports directly to the Senior Credit Officer. The appraisal review function reviews the quality of appraisals on behalf of the Bank by reviewing the methods, assumptions, and value conclusions of internal and external appraisals. In addition, this data is used to determine whether an external appraiser should be utilized for future work.

 

  7. We have retained an independent third party to perform loan reviews on a quarterly basis in 2010 and 2011 and engaged them to perform this function in June 2012 and December 2012. We have engaged them to perform this function in June 2013 and December 2013 as well. The third party loan review company has also conducted two loan portfolio stress tests for the Bank to obtain a better understanding of potential loan losses over a two year period.

 

  8. To support the focus on problem credit management the Bank further developed, in March, 2011, a Special Assets department which reports to the Chief Credit Officer. Presently, the department has two workout specialists/Vice Presidents, one Vice President managing other real estate owned properties, an analyst, and two support personnel. Substantially all the relationships in the Bank with total commitments in excess of $500,000 which are risk rated Special Mention or worse are assigned to this department. This department is organizationally structured to manage workout situations, collections, other real estate owned, nonperforming assets, watch list credits, and the Bank’s legal department related to collection efforts. New reporting and monitoring is conducted monthly by this division. Material changes to Special Asset credits are reported to the Board at the time of occurrence and, quarterly, the Board receives written action plans and status updates of the Bank’s twenty largest problem credits. A quarterly management watch list committee has been established to actively manage and monitor these credits.

 

  9. A new allowance for loan loss model was implemented and reviewed independently during 2010. The Board has approved a new allowance for loan loss policy. We have shifted duties for maintaining the allowance for loan loss model and credit reporting to a more experienced employee. The allowance for loan loss and the methodology supporting the results are approved quarterly by the Audit Committee of the Board of Directors, and ratified by the Board.

 

  10. We have significantly increased our asset based liquidity sources throughout 2010, 2011 and 2012 to meet financial obligations. A new liquidity risk management policy has been adopted and a revised contingency funding plan has been created. We have lost all of our federal funds lines of credit, but we have added an internet certificate of deposit funding source to increase contingent funding sources. We believe that we have adequate liquidity in normal and stressed situations. We are further developing an investment portfolio, as well. The investment portfolio has grown to $49.6 million at December 31, 2012 from $4.7 million at December 31, 2010.

 

  11. In the fourth quarter of 2009, we ceased the declaration of dividends from the Bank to the Company. We also deferred interest payments on our trust preferred securities issuances.

 

  12. Anti-money laundering and bank secrecy act programs and training have been enhanced.

Overview

At December 31, 2012, total assets were $719.0 million, total loans were $522.4 million, and total deposits were $652.9 million at December 31, 2012. The Company had a total net loss after tax of $6.3 million or $0.57 per basic share and per diluted share for the year ended December 31, 2012 as compared to a net loss of $8.9 million, or $0.89 per basic and per diluted share for the year ended December 31, 2011. The annualized return on average assets for the fiscal year 2012 was (0.86)% as compared to (1.07)% for the same period in 2011. The annualized return on average equity was (23.62)% for the fiscal year 2012 and (24.35)% for the same period in 2011. We did have a profitable fourth quarter in 2012 in which we made $212 thousand, the first profitable quarter since March 31, 2011.

 

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During the year 2012, we strategically decreased total assets, total loans and higher cost deposits to improve our capital position. In December 2012, the Company successfully completed a public offering of its common stock, which resulted in net proceeds of $11.4 million after $624 thousand of expenses related to the offering. Upon completion of the offering and receipt of proceeds, $7.0 million was injected in the Bank’s capital. As a result of this shrinking and capital injection, the Bank improved its capital position and maintained a well-capitalized status throughout 2012. The following Bank ratios existed at December 31, 2012 as compared to December 31, 2011, respectively: Tier 1 leverage ratio of 7.08% versus 5.99%; Tier 1 risk based capital ratio of 11.60% versus 9.28%; and total risk based capital ratio of 12.88% versus 10.56%.

Total assets decreased $61.4 million in 2012, or 7.86%, from $780.4 million at December 31, 2011. Total loans decreased $75.4 million in 2012, or 12.62%, from $597.8 million at December 31, 2011. This is the result of charge offs of $6.8 million during 2012, resolution of problem loans, slow economic recovery in our market area, decreased loan demand, tighter underwriting guidelines, and the intentional shrinking of the loan portfolio to increase regulatory capital ratios. Total deposits decreased $55.4 million, or 7.83%, from $708.3 million at December 31, 2011. The largest decrease in deposits has taken place in time deposits which have decreased from $445.7 million at December 31, 2011 to $372.5 million at December 31, 2011. This $73.2 million decrease in time deposits, or 16.42%, is the result of decreased interest rates offered in this very low interest rate environment.

For the year ending December 31, 2012, we experienced a net loss of $6.3 million as compared to a $8.9 million loss for the same period in 2011. In the year 2012, the net loss was primarily related to four areas: lower net interest income, provisions for loan losses, other real estate related expenses and a valuation allowance on our deferred tax asset. We maintained a strong net interest margin of 4.13% in 2012 as compared to 4.29% in 2011. However, the decreased volume of earning assets in 2012 and high levels of nonperforming assets decreased net interest income to $27.3 million in 2012 from $32.2 million in 2011. In 2012, we made $4.8 million in provisions for loan losses. Although lower than 2011’s total of $8.0 million, the level remains high. Expenses related to other real estate owned properties were $4.5 million in 2012. This category of expenses was less than the $5.6 million in 2011, but it remained a negative impact on earnings. We also incurred a valuation allowance on our deferred tax asset totaling $4.1 million during which has a direct impact on the net loss in 2012. We may be able to reverse the valuation allowance in the future as earnings improve resulting in taxable income to offset net loss tax carryforwards.

In May 2012, we closed four offices and merged them into existing nearby offices as a cost savings measure. This was the result of thorough branch analysis and performance evaluation. We continue to evaluate our branch network and operations to improve earnings.

The ratio of nonperforming assets to total assets lowered to 6.67% at December 31, 2012 as compared to 7.55% at December 31, 2011. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, decreased during 2012. At December 31, 2012, nonperforming assets totaled $48.0 million as compared to $58.9 million at December 31, 2011 a reduction of $10.9 million, or 18.60%. The majority of these assets are commercial real estate and farmland real estate secured loans and other real estate owned properties. We still have some real estate development projects both inside and outside of our market area, but at reduced levels than in the past. These loans outside our market area are primarily in the coastal Carolinas; which amount to only $1.8 million at December 31, 2012 as compared to $2.5 million at December 31, 2011. In addition, there are also some similar projects located in Northeastern Tennessee and one in eastern West Virginia. We are undertaking extensive efforts to work out these credits and liquidate foreclosed properties. This will take some time, but overall we believe we are making progress.

During 2012, we have continued our progress in identifying the risks in our loan portfolio. In addition, we have continued to improve our lending policies and train our lending staff on these policies and procedures. Each of these steps are critical to minimize future losses and to strengthen asset quality of the Bank. Our allowance for loan loss at December 31, 2012 is $16.8 million, or 3.22% as compared to $18.4 million, or 3.07% at December 31, 2011. The provision for loan losses decreased to $4.8 million in 2012 as compared to $8.0 million in 2011. We continue to maintain a higher level in the allowance for loan loss in light of the current economic circumstances, including the anemic recovery and believe that this level is adequate. Future provisions may be deemed necessary, however. Net charge-offs year-to-date for 2012 as a percentage of total average loans improved to 1.14% as compared to 2.24% in 2011. Impaired loans decreased $26.6 million, or 28.98%, in 2012 to $65.2 million with an estimated allowance of $5.9 million for potential losses at December 31, 2012 as compared to $91.8 million in impaired loans with an estimated allowance of $6.0 million at the end of 2011.

 

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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. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and valuation allowance.

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further 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.

Our deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” in this discussion.

For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements, found in Item 8 to this annual report on Form 10-K.

Net Interest Income and Net Interest Margin

The Company’s primary source of income, net interest income, decreased $4.9 million, or 15.20% from 2011 to 2012. The decrease in net interest income is due primarily to a reduction in loans during 2012 and the level of nonearning assets, i.e. nonaccrual loans and other real estate owned properties. Loan interest income decreased $8.6 million, or 20.85%, from $41.2 million in 2011 to $32.6 million in 2012. Interest expense decreased $3.1 million, or 32.75%, from $9.6 million for the year ending 2011 to $6.5 million in 2012 as a result of deposits re-pricing at lower interest rates at maturity, and a shift in the deposit mix whereby our higher cost time deposits were replaced with lower cost deposit products. The net interest margin for the year ending December 31, 2012 was 4.13% as compared to 4.29% for the same period in 2011. We are trying to preserve the net interest margin, but we may experience some further decrease in the net interest margin as new and renewed loans are sometimes priced at lower market interest rates. Because of the tightening of our underwriting, loan pricing may be lower than historically; however, typically more conservative underwriting reduces the likelihood of future loan losses. Loan losses negatively impact earnings through various related expenses, for example, loan loss provisions, collection expenses, etc.

 

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The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.

 

Net Interest Margin Analysis  
Average Balances, Income and Expense, and Yields and Rates  
(Dollars in thousands)  
     For the Year Ended
December 31, 2012
    For the Year Ended
December 31, 2011
    For the Year Ended
December 31, 2010
 
   Average
Balance
    Income/
Expense
     Yields/
Rates
    Average
Balance
    Income/
Expense
     Yields/
Rates
    Average
Balance
    Income/
Expense
     Yields/
Rates
 

ASSETS

                     

Loans (1), (2), (3)

   $ 556,504      $ 32,592         5.86   $ 659,298      $ 41,176         6.25   $ 742,026      $ 47,775         6.44

Federal funds sold

     1,216        3         0.25     6,202        9         0.15     25,763        44         0.17

Interest bearing deposits

     58,677        173         0.29     74,000        184         0.25     8,349        12         0.14

Other investments (3)

     44,307        965         2.18     10,952        400         3.65     7,590        197         2.61
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Earning Assets

     660,704        33,733         5.11     750,452        41,769         5.57     783,728        48,028         6.13
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: Allowance for loans losses

     (18,475          (20,805          (18,607     

Non-earning assets

     92,494             101,972             97,997        
  

 

 

        

 

 

        

 

 

      

Total Assets

   $ 734,723           $ 831.619           $ 863,118        
  

 

 

        

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

                     

Deposits

                     

Demand – Interest bearing

   $ 61,842      $ 110         0.18   $ 57,675      $ 155         0.27   $ 56,791      $ 250         0.44

Savings

     96,764        242         0.25     103,346        460         0.45     92,622        779         0.84

Time deposits

     406,669        5,018         1.23     485,072        7,717         1.59     523,990        11,112         2.12

Other Borrowings

     15,487        600         3.87     24,151        838         3.47     29,721        1,303         4.39

Trust Preferred Securities

     16,496        490         2.97     16,496        436         2.64     16,496        454         2.75
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     597,258        6,460         1.08     686,740        9,606         1.40     719,620        13,898         1.93
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     106,780             102,957             92,943        

Other liabilities

     3,913             5,338             4,307        
  

 

 

        

 

 

        

 

 

      

Total Liabilities

     707,951             795,035             816,870        

Stockholders’ Equity

     26,772             36,584             46,248        
  

 

 

        

 

 

        

 

 

      

Total Liabilities and Stockholders’ Equity

   $ 734,723           $ 831,619           $ 863,118        
  

 

 

        

 

 

        

 

 

      

Net Interest Income

     $ 27,273           $ 32,163           $ 34,130      
    

 

 

        

 

 

        

 

 

    

Net Interest Margin

          4.13          4.29          4.35
       

 

 

        

 

 

        

 

 

 

Net Interest Spread

          4.03          4.17          4.20
       

 

 

        

 

 

        

 

 

 

 

(1) Non-accrual loans have been included in the average balance of loans outstanding.
(2) Loan fees have been included in interest income on loans.
(3) Tax exempt income is not significant and has been treated as fully taxable.

Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and expense which can be attributed to rate (change in rate multiplied by old volume) and volume (change in volume multiplied by old rate) for the periods indicated.

 

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     Volume and Rate Analysis  
     (Dollars in thousands)  
     2012 Compared to 2011     2011 Compared to 2010  
   Increase (Decrease)     Increase (Decrease)  
   Volume
Effect
    Rate
Effect
    Change
in
Interest
Income/
Expense
    Volume
Effect
    Rate
Effect
    Change
in
Interest
Income/
Expense
 

Interest Income:

            

Loans

   $ (6,420   $ (2,164   $ (8,584   $ (5,326   $ (1,273   $ (6,599

Federal funds sold

     (7     1        (6     (33     (2     (35

Interest bearing deposits

     (38     27        (11     94        78        172   

Other investments

     1,218        (653     565        87        116        203   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Earning Assets

     (5,247     (2,789     (8,036     (5,178     (1,081     (6,259
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Bearing Liabilities:

            

Demand

     11        (56     (45     4        (99     (95

Savings

     (29     (189     (218     90        (409     (319

All other time deposits

     (1,247     (1,452     (2,699     (825     (2,570     (3,395

Other borrowings

     (301     63        (238     (244     (221     (465

Trust Preferred Securities

     —          54        54        —          (18     (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Bearing Liabilities

     (1,566     (1,580     (3,146     (975     (3,317     (4,292
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in Net Interest Income

   $ (3,681   $ (1,209   $ (4,890   $ (4,203   $ 2,236      $ (1,967
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

Our primary source of income comes from interest earned on loans. Loan production slowed in 2012 as evidenced by total loans decreasing $75.4 million, or 12.62%, including net charge offs of $6.4 million. This is due to the resolution of problem loans, decreased loan demand, tighter underwriting guidelines, and the intentional shrinking of the loan portfolio to increase regulatory capital ratios. We continue to serve our customers, and although the total loan portfolio has been reduced, we continue to renew existing credits and make new loans to qualified borrowers as well. We anticipate some further decreases in the loan portfolio in the near future primarily as we reduce our exposure to certain credit and market risks and decrease nonperforming loans. Lending personnel are focused on developing new and existing lending relationships which should slow the pace of the reduction in total loans subject to the impact of the underperforming economy and heightened competition in the banking industry. Total loans decreased $75.4 million in 2012 from 2011. A schedule of loans by type is set forth immediately below. Approximately 81.75% of the loan portfolio is secured by real estate at the end of 2012.

Loans receivable outstanding are summarized as follows:

 

     Loan Portfolio  
     December 31,  
(Dollars in thousands)    2012      2011      2010      2009      2008  

Commercial, financial and agricultural

   $ 65,888       $ 85,798       $ 109,418       $ 118,844       $ 110,060   

Real estate – construction

     24,327         32,389         52,307         71,854         64,595   

Real estate – mortgage

     402,703         441,107         489,314         504,071         483,471   

Installment loans to individuals

     29,445         38,522         56,755         68,801         63,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 522,363       $ 597,816       $ 707,794       $ 763,570       $ 721,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Our loan maturities as of December 31, 2012 are shown in the following table:

 

     Maturities of Loans  
(Dollars in thousands)    Less than
One Year
     One to
Five Years
     After Five
Years
     Total  

Commercial, financial and agricultural

   $ 26,534       $ 34,243       $ 5,111       $ 65,888   

Real estate – construction

     6,093         11,963         6,271         24,327   

Real estate – mortgage

     84,669         210,561         107,473         402,703   

Installment loans to individuals

     7,067         19,646         2,732         29,445   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 124,363       $ 276,413       $ 121,587       $ 522,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with fixed rates

   $ 44,221       $ 104,276       $ 120,232       $ 268,729   

Loans with variable rates

     80,142         172,137         1,355         253,634   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 124,363       $ 276,413       $ 121,587       $ 522,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

The above table reflects the earlier of the maturity or re-pricing dates for loans at December 31, 2012. In preparing this table, no assumptions are made with respect to loan prepayments. Loan principal payments are included in the earliest period in which the loan matures or can be re-priced. Principal payments on installment loans scheduled prior to maturity are included in the period of maturity or re-pricing.

Provision for 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 included in our evaluation of 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.

The allowance for loan losses decreased to $16.8 million at December 31, 2012 as compared to $18.4 million at December 31, 2011. Even so, the allowance for loan losses at the end of 2012 was approximately 3.22% of total loans as compared to 3.07% at the end of 2011. Net loans charged off decreased in 2012 as they were $6.4 million, or 1.14% of average loans, compared to $14.7 million, or 2.24% of average loans, in 2011. The provision for loan losses also decreased to $4.8 million for 2012 as compared with $8.0 million for 2011.

We have experienced a decrease in loan delinquencies and nonaccrual loans in 2012. However, loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present higher risks of default and loan losses. At December 31, 2012, there were 112 loans in non-accrual status totaling $33.5 million, or 6.42% of total loans down from the levels at December 31, 2011, in which there were 170 loans in non-accrual status totaling $42.3 million, or 7.08% of total loans. The amounts of interest that would have been recognized on these loans were $1.4 million and $1.3 million in the years 2012 and 2011, respectively. There were 15 loans past due 90 days or greater and still accruing interest totaling $511 thousand, or 0.10% of total loans at December 31, 2012 down from 47 loans past due 90 days or greater and still accruing interest totaling $1.5 million at year end 2011. It is our policy to stop accruing interest on a loan, and to classify that loan as non-accrual, under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. There were $20.0 million in loans classified as troubled debt restructurings as of December 31, 2012, also an improvement, as compared to $29.1 million in loans classified as troubled debt restructurings as of December 31, 2011. Of the loans classified as troubled debt restructurings at December 31, 2012, $5.4 million were in non-accrual status, compared to $8.2 million at December 31, 2011. We do not have any commitments to lend additional funds to non-performing debtors.

Certain risks exist in the Bank’s loan portfolio. A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize loss exposures in case of default. With the exception of real estate development type properties which have experienced more deterioration in market values, the local residential and commercial real estate market values have shown some deterioration but remain relatively stable. It is uncertain as to when or if local real estate values will be more significantly impacted. We do not believe that there will be a severely negative effect in our market area, but because of the uncertainty we deem it prudent to assign more of the allowance to these types of loans. Our market area is somewhat diverse, but certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible as the coal mining and natural gas industry have been negatively affected in the past year due to layoffs and environmental legislation. We do not foresee a major impact upon the Bank unless a severe downturn occurs which we believe is not highly likely. We are monitoring these industries. We consider these factors to be the primary higher risk characteristics of the loan portfolio.

 

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Commercial 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 to be determined by the loan officer. Guidance for the evaluation is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are exceptional, very good, standard, acceptable, transitory risk, other assets especially mentioned, substandard, doubtful and loss. For the year 2012, we engaged a third party loan review firm to conduct semiannual loan reviews and have engaged them to perform this function in 2013 on a semiannual basis. Upon their review, loans risk ratings may change from the rating assigned by the respective lender. We have experienced fewer rating changes in more recent reviews indicating better risk identification for the loan portfolio in light of the experience from the severe recession.

In regards to its consumer loans and consumer real estate loan portfolio, the Company uses a conservative approach for its risk grading and timing of charge offs on these loans. This approach is based on the guidance found in the Uniform Retail Credit Classification and Account Management Policy and as a result affects our estimate of the allowance for loan losses. Under this approach when a consumer loan or consumer real estate loan is originated, it must possess qualities of a credit risk grade of Pass for approval and will remain with the initial risk rating through maturity unless there is a deterioration in the credit quality of the loan. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, it is downgraded to Substandard. At 90 days past due, or earlier if the customer has filed bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If there is sufficient collateral, no charge-off is necessary. If there is a deficiency, then within 30 days of the loan becoming 90 days past due, or within 60 days of bankruptcy notice, the deficiency is charged-off against the allowance for loan loss. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.

All loans classified as special mention, substandard, doubtful and loss are individually reviewed for impairment. In determining impairment, collateral for loans classified as substandard, doubtful and loss is reviewed to determine if the collateral is sufficient for each of these credits, generally through the review of the appraisal. If the appraisal is current, less than twelve months old, and has been reviewed, then if no negative information regarding the appraised value is obtained, the value is accepted, and impairment, if required is made. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable. If this review determines that the appraisal is not reasonable, then a new appraisal is ordered, in most cases. In determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450), we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables topic of the Accounting Standards Codification (ASC 310). If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made for the amount of the potential loss in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Impaired loans decreased to $65.2 million with $28.1 million requiring a valuation allowance of $5.9 million at December 31, 2012 as compared to $91.8 million with $30.0 million requiring a valuation allowance of $6.0 million at December 31, 2011. Of the $65.2 million recorded as impaired loans, $30.6 million were nonperforming loans, which includes nonaccrual loans and past due 90 days or more. Management is aggressively working to reduce the impaired credits at minimal loss.

 

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Following is a summary of non-accrual and past due loans greater than 90 days still accruing interest:

 

Non-Accrual and Past Due Loans  
(Dollars in thousands)  
                 December 31,              
     2012     2011     2010     2009     2008  

Non-accruing loans

          

Commercial, financial and agricultural

   $ 10,962      $ 10,633      $ 5,970      $ 1,027      $ 100   

Real estate – construction

     2,412        5,583        15,460        13,727        2,875   

Real estate – mortgage

     20,153        26,099        22,986        9,670        3,269   

Installment loans to individuals

     9        1        1,365        289        170   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-accruing loans

     33,536        42,316        45,781        24,713        6,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans past due 90 days or more and still accruing

     551        1,504        1,693        3,875        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 34,087      $ 43,820      $ 47,474      $ 28,588      $ 6,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total loans

     6.53     7.33     6.71     3.74     0.89

The above table includes $5.4 million and $8.2 million in nonaccrual loans as of December 31, 2012 and 2011, respectively, that have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing as of December 31, 2012 and 2011. There were $20.0 million in loans classified as troubled debt restructurings as of December 31, 2012, as compared to $29.1 million in loans classified as troubled debt restructurings as of December 31, 2011.

In addition to impaired loans, the remaining loan portfolio is evaluated based on past due history, economic conditions, and internal processes. During 2011, we changed methodology of determining historical loss factors by applying our historical loss rates instead of a weighted approach that was based on the greater of Virginia peers or our own historical loss rates. Previously, we did not have sufficient historical loss rates for certain types of loans, but a loss trend has now developed and provides better support than previous data. Economic data currently used includes national and local regional unemployment information, local housing price changes, gross domestic product growth, and interest rates are external factors. Lastly, we also evaluate our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices. In the past, these factors were not directly allocated to a particular loan category and were considered unallocated in the breakdown data in the table below. During 2011, however, we further analyzed our loan portfolio and the various unallocated internal and external factors. From our analysis, we determined that certain unallocated factors were relevant to certain sectors of the loan portfolio and some to each sector. These factors were allocated accordingly. As economic conditions, performance of our loans and internal processes change, it is possible that future increases may be needed to the allowance for loan losses. The following table provides a summary of the activity in the allowance for loan losses.

 

Analysis of the Allowance for Loan Losses  
(Dollars in thousands)  
     For the Years Ended December 31,  
Activity    2012     2011     2010     2009     2008  

Beginning Balance

   $ 18,380      $ 25,014      $ 18,588      $ 6,904      $ 6,620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision charged to expense

     4,800        7,959        22,328        12,841        1,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Advances made on loans with off balance sheet provision

     —          153        —          —          —     

Loan Losses:

          

Commercial, financial and agricultural

     (1,523     (4,022     (1,911     (129     (591

Real estate – construction

     (357     (7,245     (10,002     (446     (44

Real estate – mortgage

     (4,535     (5,446     (3,867     (367     (256

Installment loans to individuals

     (336     (694     (728     (334     (420
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loan losses

     (6,751     (17,407     (16,508     (1,276     (1,311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

          

Commercial, financial and agricultural

     97        224        530        37        18   

Real estate – construction

     73        1,296        —          8        —     

Real estate – mortgage

     148        1,018        6        21        17   

Installment loans to individuals

     63        123        70        53        60   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     381        2,661        606        119        95   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge offs

     (6,370     (14,746     (15,902     (1,157     (1,216
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

   $ 16,810      $ 18,380      $ 25,014      $ 18,588      $ 6,904   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge offs as a % of average loans

     1.14     2.24     2.14     0.15     0.17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans. The allocation of the allowance as shown

 

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in the following table should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.

The allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 62% of the allowance to real estate loans, which constituted 77.09% of our loan portfolio at December 31, 2012. Mortgage loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

We have allocated 13% of the allowance to real estate construction loans, which constituted 4.66% of our loan portfolio at December 31, 2012. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Values may not always be easily ascertainable as evidenced by the current market conditions. These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities. Our allocation decreased as a percentage of the allowance for loan losses due to the $8.1 million decrease in construction real estate loans during 2012.

We have allocated 20% of the allowance to commercial loans, which constituted 12.61% of our loan portfolio at December 31, 2012. This allocation remained comparable to the 18% in 2011 despite the fact commercial loans decreased $19.9 million from 2011 to 2012 due to the $1.5 million in charge offs during 2012 that impacts our historical loss rate.

We have allocated 2% of the allowance to consumer installment loans, which constituted 5.64% of our loan portfolio at December 31, 2012. The reason for the decrease in the allocation was the result of the $9.1 million decrease in these loans during 2012.

The following table shows the balance and percentage of our allowance for loan losses (or “ALLL”) allocated to each major category of loans.

 

 

 

Allocation of the Allowance for Loan Losses  
December 31, 2008 through December 31, 2012  
(Dollars in thousands)  
     December 31, 2012     December 31, 2011     December 31, 2010  
     Amount      % of
ALLL
    % of
Loans
    Amount      % of
ALLL
    % of
Loans
    Amount      % of
ALLL
    % of
Loans
 

Commercial

   $ 3,383         20     12.61   $ 3,322         18     14.35   $ 5,323         21     15.48

R/E – const.

     2,166         13     4.66     3,848         21     5.42     4,913         20     7.39

R/E – mortg.

     10,322         62     77.09     9,578         52     73.79     6,882         27     69.13

Installment

     388         2     5.64     781         4     6.44     1,733         7     8.00

Unallocated

     551         3       851         5       6,163         25  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 16,810         100     100.00   $ 18,380         100     100.00   $ 25,014         100     100.00
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     December 31, 2009     December 31, 2008  
     Amount      % of
ALLL
    % of
Loans
    Amount      % of
ALLL
    % of
Loans
 

Commercial

   $ 1,710         9     15.56   $ 3,866         56     15.26

R/E – const.

     8,036         43     9.41     621         9     8.96

R/E – mortg.

     3,525         19     66.02     1,036         15     67.04

Installment

     1,501         8     9.01     1,381         20     8.74

Unallocated

     3,816         21       —           —       
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 18,588         100     100.00     6,904         100     100.00
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Other Real Estate Owned

Other real estate owned decreased $1.2 million, or 8.10%, to $13.9 million at December 31, 2012 from $15.1 million at December 31, 2011. We anticipate total other real estate owned to increase in the near future as we foreclose on real estate collateralized loans. All properties are being marketed for sale by commercial and residential realtors under the direction of our Special Assets division. During 2012, we were able to sell $8.1 million of our properties as compared to sales of $5.9 million in 2011. As a result we incurred losses on the sales of these properties in the amounts of $480 thousand and $218 thousand for the years 2012 and 2011, respectively. Future sales of these properties are contingent upon an economic recovery; consequently, it is difficult to estimate the duration of our ownership of these assets. We have designated employees to monitor other real estate owned properties to ensure proper fair market values of these assets and to ensure that maintenance and improvements are made to make these properties more marketable. During 2012 we had to record writedowns on other real estate owned properties in the amount of $2.6 million compared to $4.0 million in 2011. This was due to the receipt of updated valuations on the other real estate owned properties, which showed a lower fair value than our carrying amount of the properties, and accordingly we recorded a writedown on the properties.

Investment Securities

Total investment securities increased to $49.6 million at December 31, 2012 from $32.4 million at December 31, 2011 as we have intentionally increased the investment portfolio of the Bank. All securities are classified as available-for-sale for liquidity purposes. Investment securities with a carrying value of $18.4 million and $15.7 million at December 31, 2012 and 2011, were pledged to secure public deposits, overnight payment processing and for other purposes required by law.

As we curtail loans, we continue to build an investment portfolio. We anticipate slightly increasing the size of the portfolio during 2013. The portfolio will be comprised of short to mid-term investments.

The carrying values of investment securities and the different types of investments are shown in the following table:

 

Investment Securities Portfolio  
(Dollars in thousands)  
December 31,    2012      2011  

Available for Sale

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

U.S. Government Agencies

   $ 23,177       $ 23,637       $ 21,405       $ 21,633   

Taxable municipals

     —           —           1,465         1,552   

Tax-exempt municipals

     —           —           1,043         1,054   

Mortgage backed securities

     25,822         25,978         8,144         8,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 48,999       $ 49,615       $ 32,057       $ 32,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, fair value and weighted average yield of investment securities at December 31, 2012 are shown by contractual maturity and do not reflect principal paydowns for amortizing securities, in the following schedule. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Maturities of Securities  
(Dollars in thousands)  

(Dollars are in thousands)

Securities Available for Sale

   Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Due in one year or less

   $ —         $ —           —   

Due after one year through five years

     1,479         1,489         1.00

Due after five years through fifteen years

     12,240         12,357         1.46

Due after fifteen years

     35,280         35,769         1.93
  

 

 

    

 

 

    

 

 

 

Total

   $ 48,999       $ 49,615         1.78
  

 

 

    

 

 

    

 

 

 

Deposits

Total deposits were $652.9 million at December 31, 2012, a decrease of $55.4 million, or 7.83%, from $708.3 million at December 31, 2011. This decrease is attributed to our plan to decrease higher cost deposits in order to improve earnings and increase capital ratios. Most of the decrease has been in time deposits which are our highest cost deposit funding source. During 2012 we experienced a decrease in time deposits of $73.2 million. This is the result of decreased interest rates offered in this very low interest rate environment. During 2012, interest rate sensitive deposits have withdrawn to seek other investment opportunities.

 

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Demand deposits remained substantially at the same level as they slightly decreased 0.52%, or $1.0 million, from $168.1 million at December 31, 2011 to $167.1 million at December 31, 2012. We continue to maintain demand deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities. Savings deposits increased $18.7 million, or 19.78%, to $113.3 million at December 31, 2012 as compared to $94.6 million at December 31, 2011.

We expect to continue to lose higher cost and rate sensitive deposits in the near future, but at a decreased pace than in the past. However, we monitor deposits to ensure that we maintain adequate liquidity levels. We believe despite the deposit decrease, we have adequate liquidity.

Time deposits of $100,000 or more equaled approximately 21.37% of deposits at the end of 2012 and 23.61% of deposits at the end of 2011.

We have brokered deposits totaling $2.7 million with a term of 10 years. These deposits were used to fund a particular 10 year balloon mortgage product. 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 above. Total CDARs time deposits decreased to $7.2 million in 2012 as compared to $8.2 million in 2011 primarily due to lower interest rates offered by us.

Maturities of time deposits of $100,000 or more outstanding are summarized as follows:

 

Maturities of Time Deposits of $100 Thousand and More  
(Dollars in thousands)  
December 31, 2012  

Three months or less

   $ 29,337   

Over three months through six months

     21,293   

Over six months through twelve months

     29,765   

Over one year

     59,144   
  

 

 

 

Total

   $ 139,539   
  

 

 

 

Noninterest Income

Noninterest income was $5.6 million in 2012 which was comparable to the $5.5 million in 2011. During 2012 we had $537 thousand in realized gains on the sale of investment securities. Noninterest income as a percentage of average assets increased as a percentage. The ratio was 0.76% in 2012 as compared to 0.66% in 2011. We anticipate this percentage to remain flat during 2013 due to regulatory actions regarding these types of income sources; however, we continue to seek opportunities to improve noninterest income. As a part of these efforts, in June 2012 we changed the name of NPB Financial Services, Inc. to NPB Insurance Services, Inc., which will operate solely as a full-service insurance agency, dealing in personal and group life, health, and disability products in 2013.

Noninterest Expense

Noninterest expenses decreased $7.4 million, or 18.86%, to $32.0 million in 2012 from $39.4 million in 2011. The following are explanations of the decrease in non-interest expenses during 2012.

During 2011 we realized, a one time non-recurring expense of $4.1 million related to the impairment of goodwill which completely wrote-off this asset. This was a result of management’s reassessment of goodwill for impairment at December 31, 2011.

Salaries and employee benefits decreased from $15.7 million in 2011 to $13.9 million in 2012. This was a decrease of $1.8 million or 11.36% and was the result of several factors. Decreased staffing occurred during 2011 and we started to realize the results of that reduction in 2012. In addition, we froze salaries for the year 2012 in order to control this expense. In the year 2012, we also lowered the 401-k matching contribution from matching dollar for dollar on the 5% employee contribution to 3%. On May 31, 2012 we merged eight existing offices together to form four offices which reduced our total number of branches to 23. Total full time equivalent employees have decreased to 286 at December 31, 2012 from 306 at December 31, 2011, a reduction of 20, or 6.54%.

Other real estate owned and repossessed asset expenses decreased $1.1 million, or 20.06%, to $4.5 million in 2012 from $5.6 million in 2011. This decrease is related to a decrease in writedowns on other real estate owned during 2012 and a reduction of other real estate owned during 2012. We re-assessed the values of the properties in other

 

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real estate owned in 2012 and wrote down these assets by $2.6 million to reflect fair market value changes in the properties since the original date that the assets were acquired in 2012 or the prior year balance for properties that continue to be held. During 2011 we wrote down these assets by $4.0 million. In the year 2012, we had a net loss on the sale of other real estate owned property of $480 thousand compared to a net loss of $218 thousand in 2011.

In 2012, FDIC assessment expense decreased $355 thousand, or 17.63%, from $2.0 million in 2011 to $1.7 million in 2012. This is the result of the reduction of total deposits during 2012.

The ratio of noninterest expense as a percentage of average assets decreased in 2012 to 4.35% as compared to 4.74% in 2011. We expect greater efficiencies to result as we maximize the performance of our branches and as the economy improves.

Our efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 97.32% in 2012 as compared to 104.61% for 2011. Included in this calculation are the other real estate owned write-downs which significantly and negatively impact the ratio. We anticipate this ratio to improve in the future as we realize cost savings from staff reductions and the branch mergers that occurred in the second quarter of 2012. We believe that other real estate owned write-downs may reduce from the past as these have been primarily related to construction and development type properties that have been significantly impacted due to recent market valuation trends. Our level of these properties is much lower and reflects current market values.

Life Insurance

We have life insurance policies on the life of one key officer and three former key officers. The Bank is the beneficiary under each policy. In addition, we own a policy in which the Bank is the beneficiary which was collateral for a defaulted loan. The aggregate total cash surrender value of the policies was $12.0 million and $11.4 million at December 31, 2012 and December 31, 2011, respectively. Total income for the policies during 2012 was $309 thousand as compared to $340 thousand for the year ending 2011.

Deferred Tax Asset and Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a deferred tax asset of $4.7 million existed at December 31, 2012 as compared to a deferred tax asset of $7.2 million at December 31, 2011. The $2.5 million difference is primarily related to a $4.1 million deferred tax asset valuation allowance recorded in 2012, which increased the total valuation allowance to $6.8 million at December 31, 2012, compared to $2.7 million at December 31, 2011. Management reviewed the deferred tax calculation to determine the need for a valuation allowance. Based on the trend of reduced levels of earning assets and net interest income, we modified the projections of taxable income over the next three years and determined that an additional deferred tax asset valuation allowance was required during 2012. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that all the deferred tax assets, net of the $6.8 million allowance, would be realizable. Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $4.6 million. Management expects to utilize all of these carryforwards prior to expiration. Direct charge-offs contributed to a reduction of the tax asset and are permitted as tax deductions. In addition, writedowns on other real estate owned property are expensed for book purposes but are not deductible for tax purposes until disposition of the property. Goodwill expense also was realized for book purposes in 2011 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. When, and if, taxable income increases in the future and during the net operating loss carryforward period, this valuation allowance may be reversed and used to decrease tax obligations in the future. Our income tax expense was computed at the normal corporate income tax rate of 34% of taxable income included in net income. We do not have significant nontaxable income or nondeductible expenses.

After the common stock offering was concluded in December 2012, the Company evaluated whether a “change of control” as defined in Internal Revenue Code (“IRC”) section 382 had occurred. A change of control for purposes of IRC section 382 would have occurred if 50% or more of the ownership of the Company had changed as a result of the offering and stock transactions occurring in the preceding 3 years. In that case IRC section 382 would impose certain limitations which would restrict the ability of the Company to utilize the current amount of tax loss carryforwards among other future tax deductions. We concluded that a change of control did not occur under the IRC section 382. We must, however, continue to monitor any increase in the ownership of any 5% owner in the Company, of any new investors participating in the common stock offering that were not investors before the offering, and of any new 5% owner acquiring common stock from existing shareholders excluding the two aforementioned groups. If the combined additional ownership of these three groups ever causes their total ownership to exceed 50%

 

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in the next three years, the limitations of Internal Revenue Code 382 would apply. The Company is considering implementing a tax preservation plan in the near future to protect the ability to realize the future tax loss carryforwards that would help protect current investors from any such change of control under IRC section 382, if one should occur.

Capital Resources

Our total capital at the end of 2012 was $39.9 million compared to $28.9 million in 2011. The increase was $11.0 million, or 38.07%. In September 2012 we converted the notes payable to two Board members of $5.5 million plus accrued interest of $272 thousand to common stock, which resulted in an increase to capital of $5.7 million. In December 2012 we successfully completed a public offering of our common stock, which resulted in an increase to capital of $11.4 million. This $17.9 million increase in capital was offset by the net loss of $6.3 million for 2012, which was primarily the result of lower net interest income, provision for loan losses, other real estate owned property related expenses and the deferred tax asset valuation allowance expense. The Bank and the Company were both well capitalized as of December 31, 2012, as defined by the regulatory capital guidelines. New Peoples capital as a percentage of total assets was 5.54% at December 31, 2012 compared to 3.70% at December 31, 2011.

Total assets decreased in 2012 and we anticipate a slight decrease in assets to be the trend in 2013. Our primary source of capital comes from retained earnings. We developed a new strategic plan and capital plan in 2012. Under current economic conditions, we believe it is prudent to continue to increase capital to absorb potential losses that may occur if asset quality deteriorates further. We are aware that capital needs and requirements are affected by the level of problem assets, growth, earnings and other factors. Retained earnings are not alone sufficient to provide for this economic cycle and we believe we will need access to additional sources of capital. As part of our initiative to improve regulatory capital ratios, we are further reducing our higher risk assets, which results in a shrinking loan portfolio. Deposit growth is primarily focused on growing core deposits, which are mainly transaction accounts, commercial relationships and savings products. We are focused on improving earnings by maintaining a strong net interest margin and decreasing overhead expenses. We are fully implementing this strategy to increase capital. However, these efforts alone may not provide us adequate capital if further loan losses are realized.

No cash dividends have been paid historically and none are anticipated in the foreseeable future. Earnings will continue to be retained to build capital.

Liquidity

We closely monitor our liquidity and have increased liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments from $107.3 million at December 31, 2011 to $125.3 million at December 31, 2012. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2013.

At December 31, 2012, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $31.2 million, which is net of those securities pledged as collateral. This will primarily serve as a source of liquidity while yielding a higher return than other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. We have increased our investment portfolio from $32.4 million at December 31, 2011 to $49.6 million at December 31, 2012. Our strategy is to manage the portfolio with future purchases that reduce price risk in a rising interest rate environment and shorten the duration of these securities to be able to invest in higher yielding loans and investments when interest rates do rise again. We foresee purchasing additional securities in the near future as opportunities arise, and selling securities when it improves the portfolio strategies in a rising interest rate environment that may occur in the distant future.

Our loan to deposit ratio was 80.01% at December 31, 2012 and 84.40% at year end 2011. We anticipate this ratio to remain below 85% in the future. We can further lower the ratio as management deems appropriate by managing the rate of growth in our loan portfolio and by offering special promotions to entice new deposits. This can be done by changing interest rates charged or limiting the amount of new loans approved.

Available third party sources of liquidity remain intact at December 31, 2012 which includes the following: our line of credit with the Federal Home Loan Bank of Atlanta, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond.

At December 31, 2012, we had borrowings from the Federal Home Loan Bank totaling $6.6 million as compared to $18.0 million at December 31, 2011. None are overnight and subject to daily interest rate changes. The borrowings have a maturity date in the year 2018, but reduce in principal amounts monthly. The decrease of $11.4 million was due to regularly scheduled principal payments and the early payoff of the term notes of $10.2 million during the second quarter of 2012 that were to mature in the third quarter 2012. We incurred $90 thousand in prepayment

 

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penalties during the second quarter as a result of this early payoff, but this early payoff was to realize savings in interest expense expected to be incurred through the maturity dates, netting savings to the overall earnings of the Company. We also used our line of credit with the Federal Home Loan Bank to issue a letter of credit for $7.0 million in 2008 and $3.0 million in 2010 to the Treasury Board of Virginia for collateral on public funds. An additional $41.1 million was available on December 31, 2012 on the $57.7 million line of credit which is secured by a blanket lien on our residential real estate loans.

We have access to the brokered deposits market. Currently we have $2.7 million in 10 year term time deposits comprised of $3 thousand incremental deposits which yield an interest rate of 4.10%. With the exception of CDARS time deposits, we have no other brokered deposits. Though this has not been a strategy in the past, we may utilize this source in the future as a lower cost source of funds.

We are a member of an internet certificate of deposit network whereby we may obtain funds from other financial institutions at auction. We may invest funds through this network as well. Currently, we only intend to use this source of liquidity in a liquidity crisis event.

The Bank has access to additional liquidity through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, we do not anticipate using this funding source except as a last resort.

Additional liquidity is expected to be provided by loan repayments and core deposit growth that will result from an increase in market share in our targeted trade area.

With the increased asset liquidity and other external sources of funding, we believe at the Bank level we have adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control.

Concerning the Company’s liquidity, as a result of the public offering of common stock, we received net proceeds of $11.4 million after $624 thousand in offering expenses were paid. Upon receipt of the proceeds a $7.0 million was injected into capital at the Bank, which left remaining funds of $4.4 million at the Company. The remaining funds will be used to pay operating expenses, trust preferred interest payments (upon regulator approval), and provide additional capital injections to the Bank, if needed. As of now, all interest payments to the trust preferred securities is deferred. In the event, thrust preferred interest payments are no longer deferred, then the Company has the cash to meet this obligation without any reliance on the Bank.

As a result of the conversion of director notes and the common stock offering, a total of 2,370,900 common stock warrants were issued. The warrants are immediately exercisable over the next five years at a price of $1.75 per share. When, and if, these warrants are exercised, additional funds maybe received by the Company, which provides potentially up to $4.1 million in additional liquidity and capital at the Company level. Additional contingent funding sources will be explored as available.

Financial Instruments with Off-Balance-Sheet Risk

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

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

A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2012 and 2011 is as follows:

 

(Dollars in thousands)    2012      2011  

Financial instruments whose contract amounts represent credit risk:

     

Commitments to extend credit

   $ 27,887       $ 29,004   

Standby letters of credit

     2,721         3,049   

 

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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 actually 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.

Interest Sensitivity

At December 31, 2012 we had a negative cumulative gap rate sensitivity ratio of 31.67% for the one year re-pricing period, compared to 38.82% at December 31, 2011. A negative cumulative gap generally indicates that net interest income would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would probably decrease in periods during which interest rates are increasing. We are closely monitoring our position and implementing adjustments periodically to strategically position ourselves to enhance earnings in current and anticipated interest rate environments. On a quarterly basis, management reviews our interest rate risk and has decided that the current position is an acceptable risk.

 

Interest Sensitivity Analysis  
December 31, 2012  
(Dollars in thousands)  
     1- 90
Days
    91-365
Days
    1-3
Years
    4-5
Years
    6-15
Years
    Over 15
Years
    Total  

Uses of funds:

              

Loans

   $ 51,606      $ 72,529      $ 181,743      $ 94,916      $ 91,680      $ 29,889      $ 522,363   

Federal funds sold

     2        —          —          —          —          —          2   

Deposits with banks

     76,590        —          —          —          —          —          76,590   

Investments

     9,205        —          9,038        5,389        9,177        16,806        49,615   

Bank owned life insurance

     11,964        —          —          —          —          —          11,964   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 149,367      $ 72,529      $ 190,781      $ 100,305      $ 100,857      $ 46,695      $ 660,534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sources of funds:

              

Interest Bearing DDA

   $ 68,665      $ —        $ —        $ —        $ —        $ —          68,665   

Savings & MMDA

     113,280        —          —          —          —          —          113,280   

Time Deposits

     88,051        144,612        95,192        41,795        2,823        —          372,473   

Trust preferred securities

     16,496        —          —          —          —          —          16,496   

Other borrowings

     —          —          —          —          6,558        —          6,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

   $ 286,492      $ 144,612      $ 95,192      $ 41,795      $ 9,381      $ —        $ 577,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discrete Gap

   $ (137,125   $ (72,083   $ 95,589      $ 58,510      $ 91,476      $ 46,695      $ 83,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (137,125   $ (209,208   $ (113,619   $ (55,109   $ 36,367      $ 83,062     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap as % of Total Earning Assets

     (20.76 %)      (31.67 %)      (17.20 %)      (8.34 %)      5.51     12.57  

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

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Item 8. Financial Statements and Supplementary Data

FINANCIAL STATEMENTS

CONTENTS

 

     Page  

Report of the Independent Registered Public Accounting Firm

     33   

Consolidated Balance Sheets December 31, 2012 and 2011

     34   

Consolidated Statements of Operations – Years Ended December 31, 2012 and 2011

     35   

Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31, 2012 and 2011

     36   

Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2012 and 2011

     37   

Consolidated Statements of Cash Flows – Years Ended December 31, 2012 and 2011

     38   

Notes to Consolidated Financial Statements

     39   

 

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LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

New Peoples Bankshares, Inc.

Honaker, Virginia

We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New Peoples Bankshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Elliott Davis, LLC

Richmond, Virginia

March 19, 2013

Elliott Davis LLC | Elliott Davis PLLC | www.elliottdavis.com

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE DATA)

 

     2012     2011  

ASSETS

    

Cash and due from banks

   $ 17,517      $ 18,306   

Interest-bearing deposits with banks

     76,590        72,170   

Federal funds sold

     2        77   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     94,109        90,553   

Investment securities available-for-sale

     49,615        32,434   

Loans receivable

     522,363        597,816   

Allowance for loan losses

     (16,810     (18,380
  

 

 

   

 

 

 

Net Loans

     505,553        579,436   

Bank premises and equipment, net

     31,190        33,141   

Equity securities (restricted)

     2,803        3,573   

Other real estate owned

     13,869        15,092   

Accrued interest receivable

     2,374        3,067   

Life insurance investments

     11,964        11,351   

Intangible assets

     53        123   

Deferred taxes, net

     4,686        7,220   

Other assets

     2,799        4,394   
  

 

 

   

 

 

 

Total Assets

   $ 719,015      $ 780,384   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Demand deposits

    

Noninterest bearing

   $ 98,432      $ 109,629   

Interest-bearing

     68,665        58,459   

Savings deposits

     113,280        94,569   

Time deposits

     372,473        445,658   
  

 

 

   

 

 

 

Total Deposits

     652,850        708,315   

FHLB advances

     6,558        17,983   

Accrued interest payable

     1,880        1,796   

Accrued expenses and other liabilities

     1,365        1,471   

Other borrowings

     —          5,450   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     679,149        751,511   

STOCKHOLDERS’ EQUITY

    

Common stock – $2.00 par value; 50,000,000 shares authorized; 21,865,535 and 10,010,178 shares issued and outstanding at December 31, 2012 and 2011, respectively

     43,731        20,020   

Common stock warrants

     2,056        —     

Additional paid-in capital

     13,081        21,689   

Retained deficit

     (19,409     (13,085

Accumulated other comprehensive income

     407        249   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     39,866        28,873   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 719,015      $ 780,384   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

 

     2012     2011  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 32,592      $ 41,176   

Federal funds sold

     3        9   

Interest-earning deposits with banks

     173        184   

Investments

     851        301   

Dividends on equity securities (restricted)

     114        99   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     33,733        41,769   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     110        155   

Savings

     242        460   

Time deposits below $100,000

     2,994        4,768   

Time deposits above $100,000

     2,024        2,949   

FHLB advances

     472        644   

Other borrowings

     128        194   

Trust Preferred Securities

     490        436   
  

 

 

   

 

 

 

Total Interest Expense

     6,460        9,606   
  

 

 

   

 

 

 

NET INTEREST INCOME

     27,273        32,163   

PROVISION FOR LOAN LOSSES

     4,800        7,959   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     22,473        24,204   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     2,482        2,488   

Fees, commission and other income

     1,949        2,312   

Insurance and investment fees

     319        384   

Net realized gains on sale of investment securities

     537        —     

Life insurance investment income

     309        340   
  

 

 

   

 

 

 

Total Noninterest Income

     5,596        5,524   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     13,947        15,735   

Occupancy and equipment expenses

     4,211        4,533   

Advertising and public relations

     472        445   

Data processing and telecommunications

     1,743        1,654   

FDIC insurance premiums

     1,659        2,014   

Other real estate owned and repossessed assets, net

     4,458        5,577   

Impairment of goodwill

     —          4,122   

Other operating expenses

     5,498        5,342   
  

 

 

   

 

 

 

Total Noninterest Expenses

     31,988        39,422   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (3,919     (9,694

INCOME TAX EXPENSE (BENEFIT)

     2,405        (784
  

 

 

   

 

 

 

NET LOSS

   $ (6,324   $ (8,910
  

 

 

   

 

 

 

Loss Per Share

    

Basic and Fully Diluted

   $ (0.57   $ (0.89
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic and Fully Diluted

     11,181,963        10,010,178   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

(IN THOUSANDS)

 

     2012     2011  

NET LOSS

   $ (6,324   $ (8,910

Other comprehensive income (loss):

    

Investment securities activity:

    

Unrealized gains arising during the year

     777        394   

Tax related to unrealized gains

     (264     (134

Reclassification of realized gains during the year

     (537     —     

Tax related to realized gains

     182        —     
  

 

 

   

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME

     158        260   
  

 

 

   

 

 

 

TOTAL COMPREHENSIVE LOSS

   $ (6,166   $ (8,650
  

 

 

   

 

 

 

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 YEARS ENDED DECEMBER 31, 2012 AND 2011

(IN THOUSANDS INCLUDING SHARE DATA)

 

    Shares of
Common
Stock
    Common
Stock
    Common
Stock
Warrants
    Additional
Paid in
Capital
    Retained
Deficit
    Accumulated
Other
Comprehensive

Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 31, 2010

    10,010      $ 20,020      $ —        $ 21,689      $ (4,175   $ (11   $ 37,523   

Net loss

    —          —          —          —          (8,910     —          (8,910

Unrealized gain on available-for-sale securities, net of $134 tax

    —          —          —          —          —          260        260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    10,010        20,020        —          21,689        (13,085     249        28,873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    —          —          —          —          (6,324     —          (6,324

Conversion of Director notes plus accrued interest

    3,815        7,629        663        (2,570     —          —          5,722   

Common stock and common stock warrants issuance, net of costs of $624

    8,041        16,082        1,393        (6,038     —          —          11,437   

Realized gains on available-for-sale securities, net of $182 tax

    —          —          —          —          —          (355     (355

Unrealized gain on available-for-sale securities, net of $264 tax

    —          —          —          —          —          513        513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

    21,866      $ 43,731      $ 2,056      $ 13,081      $ (19,409   $ 407      $ 39,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 YEARS ENDED DECEMBER 31, 2012 AND 2011

(IN THOUSANDS)

 

     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (6,324   $ (8,910

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

    

Depreciation

     2,500        2,562   

Provision of loan losses

     4,800        7,959   

Impairment of goodwill

     —          4,122   

Income (less expenses) on life insurance

     (613     (340

Gain on sale of securities available-for-sale

     (537     —     

Loss on sale of fixed assets

     357        126   

Loss on sale of foreclosed real estate

     480        218   

Adjustment of carrying value of foreclosed real estate

     2,620        4,023   

Accretion of bond premiums/discounts

     572        70   

Deferred tax expense

     2,453        683   

Amortization of core deposit intangible

     70        101   

Net change in:

    

Interest receivable

     693        633   

Other assets

     1,595        807   

Accrued interest payable

     356        76   

Accrued expenses and other liabilities

     (106     (4
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     8,916        12,126   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     59,108        82,453   

Purchase of securities available-for-sale

     (40,828     (31,647

Proceeds from sale and maturities of securities available-for-sale

     23,851        4,195   

Sale of Federal Home Loan Bank stock

     770        305   

Payments for the purchase of premises and equipment

     (1,333     (1,921

Proceeds from sale of premises and equipment

     427        233   

Proceeds from sales of other real estate owned

     8,098        5,945   
  

 

 

   

 

 

 

Net Cash Provided by Investing Activities

     50,093        59,563   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of common stock and common stock warrants

     11,437        —     

Repayment of line of credit borrowings

     —          (4,900

Net increase in other borrowings

     —          5,200   

Repayments to Federal Home Loan Bank

     (11,425     (6,200

Net change in:

    

Demand deposits

     (991     20,227   

Savings deposits

     18,711        (13,550

Time deposits

     (73,185     (64,442
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (55,453     (63,665
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     3,556        8,024   

Cash and Cash Equivalents, Beginning of the Year

     90,553        82,529   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of the Year

   $ 94,109      $ 90,553   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Year for:

    

Interest

   $ 6,544      $ 9,682   

Taxes

   $ —        $ —     

Supplemental Disclosure of Non Cash Transactions:

    

Other real estate acquired in settlement of foreclosed loans

   $ 9,975      $ 12,932   

Loans made to finance sale of foreclosed real estate

   $ —        $ 1,000   

Conversion of Director notes in other borrowings to common stock

   $ 5,450      $ —     

Conversion of accrued interest payable on Director notes to common stock

   $ 272      $ —     

Common stock issued as a result of the conversion of Director notes

   $ 5,722      $ —     

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

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 member 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 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. On September 27, 2006, the Company established NPB Capital Trust 2 for the purpose of issuing additional trust preferred securities. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank. The name of NPB Financial Services, Inc. was changed in June 2012 to NPB Insurance Services, Inc. which will operate solely as an insurance agency.

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation Policy The consolidated financial statements include the Company, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as “The Company.”) All significant intercompany balances and transactions have been eliminated. In accordance with ASC 942, NPB Capital Trust I and 2 are not included in the consolidated financial statements.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

Cash and Cash Equivalents Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, and federal funds sold.

Investment Securities Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available for sale and carried at fair value. Securities available for sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors.

The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, net of tax, whereas realized gains and losses flow through the statement of operations.

Loans – Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectibility of the loan, in which case accrual of the income is discontinued.

It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are place on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-

 

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recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and prospects for future contractual payments are reasonably assured.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Significant Group Concentrations of Credit Risk – The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $10.0 million as of December 31, 2012. Most of the Company’s activities are with customers located within the southwest Virginia, southern West Virginia, and northeastern Tennessee region. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer.

Allowance for Loan Losses – The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms.

In regards to its consumer loans and consumer real estate loan portfolio, the Company uses a conservative approach for its risk grading and timing of charge offs on these loans. This approach is based on the guidance found in the Uniform Retail Credit Classification and Account Management Policy and as a result affects our estimate of the allowance for loan losses. Under this approach when a consumer loan or consumer real estate loan is originated, it must possess qualities of a credit risk grade of Pass for approval and will remain with the initial risk rating through maturity unless there is a deterioration in the credit quality of the loan. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, it is downgraded to Substandard. At 90 days past due, or earlier if the customer has filed bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If there is sufficient collateral, no charge-off is necessary. If there is a deficiency, then within 30 days of the loan becoming 90 days past due, or within 60 days of bankruptcy notice, the deficiency is charged-off against the allowance for loan loss. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.

Other Real Estate Owned Other real estate owned represents properties acquired through foreclosure or deed taken in lieu of foreclosure. At the time of acquisition, these properties are recorded at the lower of cost or fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to expense. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale.

 

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Bank Premises and Equipment Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:

 

Type

  

Estimated useful life

Buildings

   39 years

Paving and landscaping

   15 years

Computer equipment and software

   3 to 5 years

Vehicles

   5 years

Furniture and other equipment

   5 to 7 years

Stock Options – The Company records compensation related to stock options pursuant to ASC 718 which requires the estimated fair market value of the expense to be reflected over the period the award is earned which is presumed to be the vesting period. For additional discussion concerning stock options see Note 15, “Stock Option Plan.”

Common Stock Warrants The company issued common stock warrants as a result of its conversion of Director notes and the completion of its common stock offering in 2012. For additional discussion concerning these transactions including the terms and value of the warrants, see Note 22, “Capital.”

Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized.

In the event the Company has unrecognized tax expense in future accounting periods, the Company will recognize interest in interest expense and penalties in operating expenses. There were no interest or penalties related to an unrecognized tax position for the years ended December 31, 2012 and 2011. Because of the impact of deferred tax accounting, other than interest and penalties, the reversal of the Company’s treatment by taxing authorities would not affect the annual effective tax rate but would defer or accelerate the payment of cash to the taxing authority. The Company’s tax filings for years ended 2009 through 2012 are currently open to audit under statutes of limitations by the Internal Revenue Service (“IRS”) and the Virginia Department of Taxation. Our tax filings for the years ended 2010 and 2011 are currently under examination by the IRS.

Financial Instruments – Off-balance-sheet instruments In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded.

Comprehensive Income Generally accepted accounting principles require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Earnings Per Share Basic earnings per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflects the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options and common stock warrants and are determined by the Treasury Method. For the years ending December 31, 2012 and 2011, potential common shares were anti-dilutive and were not included in the calculation. Basic and diluted net loss per common share calculations follows:

 

(Amounts in Thousands, Except

Share and Per Share Data)

   For the years ended
December 31,
 
     2012     2011  

Net loss available to common shareholders

   $ (6,324   $ (8,910
  

 

 

   

 

 

 

Weighted average shares outstanding

     11,181,963        10,010,178   
  

 

 

   

 

 

 

Weighted average dilutive shares outstanding

     11,181,963        10,010,178   
  

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.57   $ (0.89
  

 

 

   

 

 

 

 

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Advertising Cost Advertising costs are expensed in the period incurred.

Business Combinations For purchase acquisitions accounted for as a business combination, the Company is required to record the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization method for such intangible assets. In addition, purchase acquisitions may result in goodwill, which is subject to ongoing periodic impairment testing based on the fair value of net assets acquired compared to the carrying value of goodwill. Changes in acquisition multiples, the overall interest rate environment, or the continuing operations of the assets acquired could have a significant impact on the periodic impairment testing. For additional discussion concerning our valuation of intangible assets, see Note 13, “Intangible Assets.”

Reclassification Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’ equity previously reported were not affected by these reclassifications.

Subsequent Events The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

 

NOTE 3 FORMAL WRITTEN AGREEMENT:

Effective July 29, 2010, the Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond (“Reserve Bank”) and the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) called (the “Written Agreement”). At December 31, 2012, we believe we have not yet achieved full compliance with the Written Agreement but we have made progress in our compliance efforts under the Written Agreement and all of the written plans required to date, as discussed in the following paragraphs, have been submitted on a timely basis.

Under the terms of the Written Agreement, the Bank has agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Written Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the Reserve Bank.

Under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Written Agreement, the Company and the Bank have appointed a committee to monitor compliance with the Written Agreement. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Written Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

 

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NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:

The Bank had federal funds sold and cash on deposit with other commercial banks amounting to $76.6 million and $72.3 million at December 31, 2012 and 2011, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.

The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank. At December 31, 2012 and 2011, all required reserves were met by the Bank’s vault cash.

 

NOTE 5 INVESTMENT SECURITIES:

The amortized cost and estimated fair value of securities (all available-for-sale) are as follows:

 

(Dollars are in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Approximate
Fair

Value
 

December 31, 2012

           

U.S. Government Agencies

   $ 23,177       $ 473       $ 13       $ 23,637   

Mortgage backed securities

   $ 25,822       $ 210       $ 54       $ 25,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 48,999       $ 683       $ 67       $ 49,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

U.S. Government Agencies

   $ 21,405       $ 238       $ 10       $ 21,633   

Taxable municipals

   $ 1,465       $ 89       $ 2       $ 1,552   

Tax-exempt municipals

   $ 1,043       $ 11       $ —         $ 1,054   

Mortgage backed securities

   $ 8,144       $ 67       $ 16       $ 8,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 32,057       $ 405       $ 28       $ 32,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2012 and December 31, 2011.

 

     Less than 12 Months      12 Months or More      Total  
(Dollars are in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

December 31, 2012

                 

U.S. Government Agencies

   $ 2,931       $ 13       $ —         $ —         $ 2,931       $ 13   

Mtg. backed securities

     7,491         54         —           —           7,491         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 10,422       $ 67       $ —         $ —         $ 10,422       $ 67   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

U.S. Government Agencies

   $ 5,592       $ 10       $ —         $ —         $ 5,592       $ 10   

Taxable municipals

     572         2         —           —           572         2   

Mtg. backed securities

     4,055         16         —           —           4,055         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 10,219       $ 28       $ —         $ —         $ 10,219       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2012, the available-for-sale portfolio included ten investments for which the fair market value was less than amortized cost. At December 31, 2011, the available-for-sale portfolio included eleven investments for which the fair market value was less than amortized cost. Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. No securities had an other than temporary impairment.

 

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The amortized cost and fair value of investment securities at December 31, 2012, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars are in thousands)

Securities Available for Sale

   Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Due in one year or less

   $ —         $ —           —   

Due after one year through five years

     1,479         1,489         1.00

Due after five years through fifteen years

     12,240         12,357         1.46

Due after fifteen years

     35,280         35,769         1.93
  

 

 

    

 

 

    

 

 

 

Total

   $ 48,999       $ 49,615         1.78
  

 

 

    

 

 

    

 

 

 

Investment securities with a carrying value of $18.4 million and $15.7 million at December 31, 2012 and 2011, were pledged to secure public deposits, overnight payment processing 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 $2.8 million and $3.6 million as of December 31, 2012 and 2011, respectively.

 

NOTE 6 LOANS:

Loans receivable outstanding at December 31, are summarized as follows:

 

(Dollars are in thousands)    2012      2011  

Real estate secured:

     

Commercial

   $ 149,935       $ 170,789   

Construction and land development

     24,327         32,389   

Residential 1-4 family

     240,201         255,998   

Multifamily

     12,567         14,320   

Farmland

     33,068         40,106   
  

 

 

    

 

 

 

Total real estate loans

     460,098         513,602   

Commercial

     28,314         39,327   

Agriculture

     4,328         6,147   

Consumer installment loans

     29,445         38,522   

All other loans

     178         218   
  

 

 

    

 

 

 

Total loans

   $ 522,363       $ 597,816   
  

 

 

    

 

 

 

Loans receivable on nonaccrual status at December 31, are summarized as follows:

 

(Dollars are in thousands)    2012      2011  

Real estate secured:

     

Commercial

   $ 16,308       $ 19,169   

Construction and land development

     2,412         5,583   

Residential 1-4 family

     3,403         4,829   

Multifamily

     442         2,101   

Farmland

     7,750         5,257   
  

 

 

    

 

 

 

Total real estate loans

     30,315         36,939   

Commercial

     2,762         4,522   

Agriculture

     450         854   

Consumer installment loans

     9         1   

All other loans

     —           —     
  

 

 

    

 

 

 

Total loans receivable on nonaccrual status

   $ 33,536       $ 42,316   
  

 

 

    

 

 

 

Total interest income not recognized on nonaccrual loans for 2012 and 2011 was $1.4 million and $1.3 million, respectively. Total interest income recognized on nonaccrual loans for 2012 and 2011 was $865 thousand and $1.1 million, respectively.

 

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Table of Contents

The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2012 and December 31, 2011:

 

As of December 31, 2012

(Dollars are in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized
    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

             

Real estate secured:

             

Commercial

   $ 26,662       $ 829      $ 20,389       $ 21,434       $ —     

Construction and land development

     4,759         118        3,759         8,618         —     

Residential 1-4 family

     7,824         227        6,308         6,567         —     

Multifamily

     1,021         44        928         998         —     

Farmland

     7,748         168        4,375         4,810         —     

Commercial

     2,499         18        1,111         1,147         —     

Agriculture

     463         7        109         109         —     

Consumer installment loans

     83         10        98         98         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

     14,770         347        13,495         14,014         3,196   

Construction and land development

     1,728         41        793         945         177   

Residential 1-4 family

     5,473         203        3,830         3,836         577   

Multifamily

     1,589         68        2,028         2,096         456   

Farmland

     4,972         (123     5,702         5,714         635   

Commercial

     1,689         19        1,881         1,885         491   

Agriculture

     373         3        353         353         308   

Consumer installment loans

     69         3        27         27         16   

All other loans

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 81,722       $ 1,982      $ 65,186       $ 72,651       $ 5,856   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

              

Real estate secured:

              

Commercial

   $ 32,370       $ 1,356       $ 31,633       $ 33,175       $ —     

Construction and land development

     14,288         125         6,954         12,838         —     

Residential 1-4 family

     6,406         315         8,221         8,296         —     

Multifamily

     619         31         613         613         —     

Farmland

     13,005         435         10,364         10,554         —     

Commercial

     2,958         60         3,529         4,070         —     

Agriculture

     396         1         521         817         —     

Consumer installment loans

     4         1         9         9         —     

All other loans

     —           —           —           —           —     

With an allowance recorded:

              

Real estate secured:

              

Commercial

     9,887         691         14,482         14,973         2,794   

Construction and land development

     2,917         87         2,289         2,310         474   

Residential 1-4 family

     5,111         277         6,473         6,764         1,052   

Multifamily

     —           —           —           —           —     

Farmland

     2,354         119         4,192         4,192         605   

Commercial

     1,982         75         1,857         1,857         649   

Agriculture

     758         28         641         641         448   

Consumer installment loans

     41         3         43         43         24   

All other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 93,096       $ 3,604       $ 91,821       $ 101,152       $ 6,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

An age analysis of past due loans receivable was as follows:

 

As of December 31, 2012

(Dollars are in thousands)

   Loans
30-59
Days
Past
Due
     Loans
60-89
Days
Past
Due
     Loans
90 or
More
Days
Past
Due
     Total
Past
Due
Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or
More
Days
Past
Due
 

Real estate secured:

                    

Commercial

   $ 4,164       $ 998       $ 8,889       $ 14,051       $ 135,884       $ 149,935       $ —     

Construction and land development

     653         —           254         907         23,420         24,327         —     

Residential 1-4 family

     9,031         861         3,027         12,919         227,282         240,201         304   

Multifamily

     90         —           442         532         12,035         12,567         —     

Farmland

     1,777         —           5,871         7,648         25,420         33,068         191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     15,715         1,859         18,483         36,057         424,041         460,098         495   

Commercial

     135         12         2,104         2,251         26,063         28,314         2   

Agriculture

     117         12         360         489         3,839         4,328         —     

Consumer installment Loans

     506         66         55         627         28,818         29,445         54   

All other loans

     19         7         —           26         152         178         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 16,492       $ 1,956       $ 21,002       $ 39,450       $ 482,913       $ 522,363       $ 551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Loans
30-59
Days
Past
Due
     Loans
60-89
Days
Past
Due
     Loans
90 or
More
Days
Past
Due
     Total
Past
Due
Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or
More
Days
Past
Due
 

Real estate secured:

                    

Commercial

   $ 9,754       $ 2,294       $ 7,771       $ 19,819       $ 150,970       $ 170,789       $ —     

Construction and land development

     595         238         5,280         6,113         26,276         32,389         —     

Residential 1-4 family

     9,471         1,412         4,101         14,984         241,014         255,998         1,129   

Multifamily

     —           1,777         218         1,995         12,325         14,320         —     

Farmland

     2,841         624         3,800         7,265         32,841         40,106         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     22,661         6,345         21,170         50,176         463,426         513,602         1,129   

Commercial

     551         34         2,938         3,523         35,804         39,327         117   

Agriculture

     268         88         458         814         5,333         6,147         3   

Consumer installment Loans

     822         133         221         1,176         37,346         38,522         222   

All other loans

     26         9         33         68         150         218         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 24,328       $ 6,609       $ 24,820       $ 55,757       $ 542,059       $ 597,816       $ 1,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

Pass Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

Special Mention Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

Substandard A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

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Doubtful Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Based on the most recent analysis performed, the risk category of loans receivable was as follows:

 

As of December 31, 2012

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 117,945       $ 5,782       $ 26,120       $ 88       $ 149,935   

Construction and land development

     18,502         1,067         4,758         —           24,327   

Residential 1-4 family

     220,534         4,739         14,437         491         240,201   

Multifamily

     9,765         178         2,624         —           12,567   

Farmland

     21,560         1,247         10,261         —           33,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     388,306         13,013         58,200         579         460,098   

Commercial

     21,793         3,227         3,254         40         28,314   

Agriculture

     3,841         53         434         —           4,328   

Consumer installment loans

     29,159         21         261         4         29,445   

All other loans

     178         —           —           —           178   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 443,277       $ 16,314       $ 62,149       $ 623       $ 522,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 112,694       $ 18,377       $ 39,573       $ 145       $ 170,789   

Construction and land development

     23,203         1,224         7,962         —           32,389   

Residential 1-4 family

     209,863         17,137         27,730         1,268         255,998   

Multifamily

     11,727         1,909         684         —           14,320   

Farmland

     21,715         4,957         13,022         412         40,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     379,202         43,604         88,971         1,825         513,602   

Commercial

     32,018         2,045         4,227         1,037         39,327   

Agriculture

     4,743         678         726         —           6,147   

Consumer installment loans

     36,107         900         1,484         31         38,522   

All other loans

     218         —           —           —           218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 452,288       $ 47,227       $ 95,408       $ 2,893       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTE 7 ALLOWANCE FOR LOAN LOSSES:

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of December 31, 2012

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 5,671       $ (2,845   $ 61       $ —         $ 3,833      $ 6,720   

Construction and land development

     3,848         (357     73         —           (1,398     2,166   

Residential 1-4 family

     3,759         (1,615     87         —           819        3,050   

Multifamily

     148         (75     —           —           479        552   

Farmland

     951         (577     —           —           700        1,074   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     14,377         (5,469     221         —           4,433        13,562   

Commercial

     1,883         (942     86         —           745        1,772   

Agriculture

     486         (4     11         —           40        533   

Consumer installment loans

     781         (336     63         —           (120     388   

All other loans

     2         —          —           —           2        4   

Unallocated

     851         —          —           —           (300     551   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 18,380       $ (6,751   $ 381       $ —         $ 4,800      $ 16,810   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of December 31, 2012

(Dollars are in thousands)

   Individually
Evaluated
for
Impairment
     Collectively
Evaluated
for
Impairment
     Total      Individually
Evaluated
for
Impairment
     Collectively
Evaluated
for
Impairment
     Total  

Real estate secured:

                 

Commercial

   $ 3,196       $ 3,524       $ 6,720       $ 33,884       $ 116,051       $ 149,935   

Construction and land

development

     177         1,989         2,166         4,552         19,775         24,327   

Residential 1-4 family

     577         2,473         3,050         10,138         230,063         240,201   

Multifamily

     456         96         552         2,956         9,611         12,567   

Farmland

     635         439         1,074         10,077         22,991         33,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,041         8,521         13,562         61,607         398,491         460,098   

Commercial

     491         1,281         1,772         2,992         25,322         28,314   

Agriculture

     308         225         533         462         3,866         4,328   

Consumer installment loans

     16         372         388         125         29,320         29,445   

All other loans

     —           4         4         —           178         178   

Unallocated

     —           551         551         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,856       $ 10,954       $ 16,810       $ 65,186       $ 457,177       $ 522,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of December 31, 2011

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 5,141       $ (4,147   $ 877       $ —         $ 3,800      $ 5,671   

Construction and land development

     4,913         (7,245     1,296         153         4,731        3,848   

Residential 1-4 family

     1,699         (1,299     141         —           3,218        3,759   

Multifamily

     42         —          —           —           106        148   

Farmland

     922         (511     66         —           474        951   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     12,717         (13,202     2,380         153         12,329        14,377   

Commercial

     3,281         (2,480     140         —           942        1,883   

Agriculture

     1,120         (1,031     18         —           379        486   

Consumer installment loans

     1,733         (694     123         —           (381     781   

All other loans

     —           —          —           —           2        2   

Unallocated

     6,163         —          —           —           (5,312     851   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 25,014       $ (17,407   $ 2,661       $ 153       $ 7,959      $ 18,380   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of December 31, 2011

(Dollars are in thousands)

   Individually
Evaluated
for
Impairment
     Collectively
Evaluated
for
Impairment
     Total      Individually
Evaluated
for
Impairment
     Collectively
Evaluated
for
Impairment
     Total  

Real estate secured:

                 

Commercial

   $ 2,794       $ 2,877       $ 5,671       $ 46,115       $ 124,674       $ 170,789   

Construction and land development

     474         3,374         3,848         9,243         23,146         32,389   

Residential 1-4 family

     1,052         2,707         3,759         14,694         241,304         255,998   

Multifamily

     —           148         148         613         13,707         14,320   

Farmland

     605         346         951         14,556         25,550         40,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     4,925         9,452         14,377         85,221         428,381         513,602   

Commercial

     649         1,234         1,883         5,386         33,941         39,327   

Agriculture

     448         38         486         1,162         4,985         6,147   

Consumer installment loans

     24         757         781         52         38,470         38,522   

All other loans

     —           2         2         —           218         218   

Unallocated

     —           851         851         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,046       $ 12,334       $ 18,380       $ 91,821       $ 505,995       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

 

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Table of Contents
NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

At December 31, 2012 there were $20.0 million in loans that are classified as troubled debt restructurings compared to $29.1 million at December 31, 2011. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 2012 and 2011.

 

     December 31, 2012      December 31, 2011  

Troubled Debt Restructurings

(Dollars are in thousands)

   # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
     # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
 

Real estate secured:

                 

Commercial

     6       $ 792       $ 783         14       $ 14,651       $ 14,321   

Construction and land Development

     —           —           —           2         179         176   

Residential 1-4 family

     32         1,602         1,497         14         2,914         2,893   

Multifamily

     —           —           —           2         454         452   

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     38         2,394         2,280         32         18,198         17,842   

Commercial

     —           —           —           6         1,111         1,081   

Agriculture

     —           —           —           2         390         390   

Consumer installment loans

     2         23         16         9         168         155   

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     40       $ 2,417       $ 2,296         49       $ 19,867       $ 19,468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended 2012, the Company modified 40 loans that were considered to be troubled debt restructurings. We modified the terms for 6 of these loans and the interest rate was lowered for 32 of these loans. On 2 loans we modified the terms and lowered the interest rate. During the year ended 2011, the Company modified 49 loans that were considered to be troubled debt restructurings. We modified the terms for 25 of these loans and the interest rate was lowered for 9 of these loans. On 15 loans we modified the terms and lowered the interest rate.

The following table presents information related to loans modified as a troubled debt restructurings that subsequently defaulted during the years ended December 31, 2012 and 2011, and within twelve months of their modification date. A troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

Troubled Debt Restructurings

That Subsequently Defaulted

   December 31, 2012      December 31, 2011  

During the Period

(Dollars are in thousands)

   # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 

Real estate secured:

           

Commercial

     4       $ 1,764         3       $ 1,691   

Construction and land development

     —           —           —           —     

Residential 1-4 family

     3         290         1         113   

Multifamily

     1         —           —           —     

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     8         2,054         4         1,804   

Commercial

     —           —           —           —     

Agriculture

     1         300         —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9       $ 2,354         4       $ 1,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

In determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further writedown the carrying value of the loan.

 

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Table of Contents
NOTE 9 BANK PREMISES AND EQUIPMENT:

Bank premises and equipment at December 31, are summarized as follows:

 

(Dollars are in thousands)    2012     2011  

Land

   $ 10,171      $ 10,421   

Buildings and improvements

     23,468        24,043   

Furniture and equipment

     15,129        13,874   

Vehicles

     514        504   

Construction in progress

     232        232   
  

 

 

   

 

 

 
     49,514        49,074   

Less accumulated depreciation

     (18,324     (15,933
  

 

 

   

 

 

 

Bank Premises and Equipment

   $ 31,190      $ 33,141   
  

 

 

   

 

 

 

Depreciation expense for 2012 and 2011 was $2.5 million and $2.6 million, respectively.

 

NOTE 10 OTHER TIME DEPOSITS:

The aggregate amount of time deposits with a minimum denomination of $100,000 was $139.5 million and $167.2 million at December 31, 2012 and 2011, respectively. We have brokered deposits totaling $2.7 million at December 31, 2012 and 2011, respectively. At December 31, 2012, the scheduled maturities of time deposits are as follows (dollars are in thousands):

 

2013

   $ 232,936   

2014

     48,929   

2015

     45,859   

2016

     27,554   

2017

     14,372   

After five years

     2,823   
  

 

 

 

Total

   $ 372,473   
  

 

 

 

 

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Table of Contents
NOTE 11 INCOME TAX EXPENSE (BENEFIT):

The components of income tax expense for the years ended December 31, are as follows:

 

(Dollars are in thousands)    2012     2011  

Current benefit

   $ (48   $ (1,467

Deferred tax expense

     2,453        683   
  

 

 

   

 

 

 

Net income tax expense (benefit)

   $ 2,405      $ (784
  

 

 

   

 

 

 

The deferred tax expense (benefit) resulting from temporary differences for the years ended December 31 is as follows:

 

(Dollar are in thousands)    2012     2011  

Organization and start-up cost

   $ —        $ —     

Provision for loan losses

     534        2,255   

Provision for loan commitments

     —          164   

Depreciation

     (197     294   

Deferred compensation expense

     (6     17   

Accrued employee benefits

     37        (10

Nonaccrual loan interest

     16        492   

Other real estate owned

     (28     (1,038

Net operating loss carryforward

     (2,019     (2,621

Goodwill

     93        (1,308

Valuation allowance

     4,057        2,723   

Other tax adjustment

     (34     (285
  

 

 

   

 

 

 

Deferred Income Tax Expense

   $ 2,453      $ 683   
  

 

 

   

 

 

 

The net deferred tax assets and liabilities resulting from temporary differences as of December 31 are summarized as follows:

 

(Dollars are in thousands    2012     2011  

Deferred Tax Assets

    

Allowance for loan losses

   $ 5,715      $ 6,249   

Deferred compensation

     126        120   

Accrued employee benefits

     49        86   

Nonaccrual loan interest

     79        95   

Other real estate owned

     1,551        1,523   

Repossessions

     47        —     

Amortization of core deposits

     156        151   

Amortization of goodwill

     888        981   

Capitalized interest and repair expense

     47        48   

Net operating loss carryforward

     4,640        2,621   

AMT carryforward

     252        252   

Unrealized loss on securities available for sale

     —          —     
  

 

 

   

 

 

 

Total Assets, gross

     13,550        12,126   

Valuation allowance

     (6,780     (2,723
  

 

 

   

 

 

 

Total Assets, net

     6,770        9,403   
  

 

 

   

 

 

 

Deferred Tax Liabilities

    

Accelerated depreciation

     1,601        1,798   

Prepaid expenses

     182        202   

Deferred loan costs

     92        55   

Unrealized gain on securities available for sale

     209        128   
  

 

 

   

 

 

 

Total Liabilities, gross

     2,084        2,183   
  

 

 

   

 

 

 

Net Deferred Tax Asset

   $ 4,686      $ 7,220   
  

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 34%:

 

(Dollars are in thousands)    2012     2011  

Income tax benefit at the applicable federal rate

   $ (1,332   $ (3,296

Permanent differences resulting from:

    

Nondeductible expenses

     7        8   

Tax exempt interest income

     (68     (64

State income taxes less federal tax effect

     31        84   

Bank owned life insurance

     (133     (116

Deferred tax valuation allowance change, net

     4,057        2,723   

Other adjustments

     (157     (123
  

 

 

   

 

 

 

Income Tax Expense (benefit)

   $ 2,405      $ (784
  

 

 

   

 

 

 

Management reviewed the December 31, 2012 deferred tax calculation to determine the need for a valuation allowance. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that all the deferred tax assets, net of the $6.8 million allowance, would be realizable. Management is required to consider all evidence, both positive and negative in making this determination. Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $4.6 million. Management expects to utilize all of these carryforwards prior to expiration.

The Company’s tax filings for years ended 2009 through 2012 are currently open to audit under statutes of limitations by the Internal Revenue Service (“IRS”) and the Virginia Department of Taxation. Our tax filings for the years ended 2010 and 2011 are currently under examination by the IRS.

 

NOTE 12 RELATED PARTY TRANSACTIONS:

During the year, officers and directors (and companies controlled by them) were customers of and had loan transactions with the Bank in the normal course of business which amounted to $4.0 million at December 31, 2012 and $4.0 million at December 31, 2011. During the year ended December 31, 2012, total principal additions were $5.7 million and principal payments were $5.7 million, including renewals and advances on revolving lines of credit. During the year ended December 31, 2011, total principal additions were $3.4 million and principal payments were $4.9 million, including renewals and advances on revolving lines of credit. These transactions were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Total related party deposits held at the Bank were $9.9 million and $10.9 million at the end of years 2012 and 2011, respectively.

In December, 2010, the Company borrowed $250,000 from Director Scott White for one year. The note bore interest at the variable rate of interest equal to the Wall Street Journal prime rate payable at maturity or conversion, was unsecured and was convertible into the Company’s common stock under certain conditions. In January, 2011, the Company received an additional $250,000 loan from Director Lynn Keene on identical terms. The purpose of these borrowings was to provide cash for operating expenses of the Company. On March 16, 2011 Directors Keene and White loaned the Company an additional $4.95 million which, after receiving regulatory approval, the Company used to retire its indebtedness to the FDIC as receiver for Silverton Bank. The loans had a stated maturity of December 31, 2011 with the same terms as the previous notes. In each case, the Company was obligated to convert the debt into the Company’s common stock if, before the stated maturity, the Company conducted an offering of its common stock at the price per share at which it was offered. If the Company did not conduct an offering prior to the stated maturity, the Company had the option, but not the obligation, to convert the debt into shares of its common stock within 30 days of the stated maturity at a price per share to be established by the Company’s Board of Directors. On December 21, 2011, with regulatory approval the Company consolidated the earlier loans into a loan in the principal amount of $2.8 million from Director White and $2.65 million from Director Keene on the same terms as the previous loans except that the maturity date of the borrowings was extended to June 30, 2012. Prior to their maturity, the maturity of the loans was extended to December 31, 2012 on the same terms. The Company believes this indebtedness was on more favorable terms to the Company than could be obtained from unrelated parties.

On September 19, 2012, in conjunction with the public offering of its common stock, the Company converted both notes to common stock and Mr. White received 1,959,889 shares and Mr. Keene received 1,854,630 shares. Each director also obtained warrants that are immediately exercisable to purchase common stock over the next five years at a price of $1.75 per share. Mr. White received 391,977 warrants and Mr. Keene received 370,926 warrants. These conversions were made on the same terms as the public offering as required by the notes.

 

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During 2010, the branch location in Grundy, Virginia which was part of a condominium in which the Bank and Director Michael McGlothlin owned the only units was condemned by the Virginia Department of Transportation. The value of the Bank’s interest in its condemned condominium units was $892 thousand and the value of Director McGlothlin’s interest in his condemned condominium unit was $455 thousand as appraised by the Virginia Department of Transportation. Subsequently, a new building was constructed on adjacent property with the condemnation proceeds. The Bank’s branch in the new building was opened on January 31, 2011 and a portion of the building comparable to his condemned unit was occupied by Director McGlothlin at this time as well. Throughout 2011 additional work was conducted by the contractor. Minor projects remained at the end of 2011 and were completed during 2012. The parties intend the new building to be subject to a condominium agreement, the terms of which had not been finalized at the end of 2012, although they are likely to be substantially similar to the terms of the previous condominium arrangement. Final settlement of the transaction is expected to occur no later than the end of the 1st Quarter 2013 on terms the Bank believes are consistent with an arm’s length market transaction.

 

NOTE 13 INTANGIBLE ASSETS:

In 2007, the Bank completed the acquisition of two branches in which certain intangible assets were identified related to the value of core deposits. The estimated fair value of the core deposits was determined based on the present value of future cash flow related to those deposits considering the industry standard “financial instrument” type present value methodology. All-in costs and runoff balances by year were discounted by term specific Federal Home Loan Bank advance rates used as a measure of the best available approximate alternative costs of funds. The estimated economic advantage embedded in the acquired deposits as compared to alternative values is the core deposit intangible.

 

(Dollars are in thousands)    Gross
Carrying
Value
     Accumulated
Amortization
     Net Carrying
Value
 

December 31, 2012

        

Amortizable core deposit intangibles

   $ 810       $ 757       $ 53   

December 31, 2011

        

Amortizable core deposit intangibles

   $ 810       $ 687       $ 123   

Amortization expense related to these intangibles is based upon the average economic life of the core deposits. The estimates of expense for the periods are as indicated below using the sum of the years’ digits method of amortization.

 

(Dollars are in thousands)       

Estimated amortization expense

  

For the year ended December 31, 2013

   $ 45   

For the year ended December 31, 2014

     8   
  

 

 

 

Total

   $ 53   
  

 

 

 

Goodwill is tested in accordance with ASC 350 at least annually, as of November 30, to determine if there is any impairment. Based on the results of testing conducted as of November 30, 2011, goodwill was determined to not be impaired. However, due to a trade in the Company’s common stock that occurred after year end 2011 and other factors, Management determined that there was indication that goodwill may be impaired. Accordingly, goodwill was also tested for impairment as of December 31, 2011. As a result of this test, it was determined that an impairment charge of $4.1 million was necessary, which resulted in a complete write-off of the goodwill as of December 31, 2011.

 

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NOTE 14 RETIREMENT PLANS:

The Company has established a qualified defined contribution plan that covers all full time employees. Effective January 1, 2012 the qualified defined contribution plan was modified where the Company matched employee contributions up to a maximum of 3% of their salary for 2012. For 2011, the Company matched employee contributions up to a maximum of 5% of their salary. The Company contributed $248 thousand and $504 thousand to the defined contribution plan for 2012 and 2011, respectively.

In addition, in 2002, the Bank established a salary continuation plan for key executives, which is funded by single premium life insurance policies. Expenses related to the plan were $26 thousand and $55 thousand for 2012 and 2011, respectively.

 

NOTE 15 STOCK OPTION PLAN:

New Peoples’ Stock Option Plan (“the Plan”) was adopted on September 27, 2001. The purpose of the Plan is to reward employees and directors for services rendered and investment risks undertaken to date and to promote the success of the Company by providing incentives to employees and directors that will promote the identification of their personal interest with the long-term financial success of the Company and with growth in shareholder value. The Plan provides that options for up to 1,287,000 shares of the Company’s common stock may be issued to employees and directors. The exercise price may not be less than 100% of the fair market value of the shares on the award date. Each award becomes exercisable in the event of a change in control of the Company. All options are subject to exercise or forfeiture if the Company’s capital falls below minimum requirements, as determined by its primary state or federal regulator. The Plan expired on May 31, 2011. All options granted and outstanding are fully vested. The Company did not grant any options in 2012 and 2011. No stock options were exercised in 2012 and 2011.

Information about stock options outstanding at December 31, 2012 follows:

 

Exercise Price

   Number
Outstanding
And
Exerciseable
     Weighted
Average
Remaining
Contractrual
Life
     Weighted
Average
Exercise
Price
 

$   6.99

     54,567         1.01 years      

$   9.44

     78,521         1.92 years      

$ 11.54

     238,778         2.97 years      
  

 

 

    

 

 

    

Totals

     371,866         2.46 years       $ 10.43   
  

 

 

    

 

 

    

 

 

 

A summary of the status of the Company’s stock option plan is presented below:

 

     2012      2011      2010  
     Number of
Shares
    Weighted
Average
Exercise
Price
     Number of
Shares
    Weighted
Average
Exercise
Price
     Number of
Shares
    Weighted
Average
Exercise
Price
 

Outstanding and exercisable, Beginning of year

     461,773      $ 10.08         771,344      $ 8.81         920,256      $ 8.77   

Exercised

     —          —           —          —           (1,141     6.88   

Forfeited

     (46,116     10.18         (154,382     8.58         (147,771     8.58   

Expired

     (43,791     6.99         (155,189     5.25         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding and exercisable, End of year

     371,866      $ 10.43         461,773      $ 10.08         771,344      $ 8.81   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK:

The principal source of funds of the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. In October 2009, a restriction prohibiting the payment of dividends from the Bank to the Company was imposed by the Federal Reserve Bank of Richmond. Therefore, no dividends will be available to the Company from the Bank until such restriction is removed.

 

NOTE 17 LEASING ACTIVITIES:

The Company’s leasing activities consist of the leasing of land and buildings under agreements in which the Bank is lessee. These leases have been classified as operating leases.

Future minimum rental payments, required under non-cancelable operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2012 is approximately $6 thousand per year for the next five years.

Rental commitments of less than one year are not included. Rentals charged to operations under operating leases were $12 thousand and $13 thousand for the years ended 2012 and 2011, respectively.

 

NOTE 18 AVAILABLE LINES OF CREDIT AND FEDERAL HOME LOAN BANK ADVANCES:

The Bank has the ability to borrow up to an additional $41.1 million from the Federal Home Loan Bank under a line of credit which is secured by a blanket lien on residential real estate loans. The Bank had no overnight borrowings subject to daily rate changes from the Federal Home Loan Bank at December 31, 2012 or 2011. All other borrowings are at fixed rates.

The Bank had $6.6 million in term borrowings with the Federal Home Loan Bank at December 31, 2012 and $18.0 million at December 31, 2011. During 2012 we incurred a $90 thousand prepayment penalty due to the early payoff of the two convertible notes totaling $10.2 million at December 31, 2011 with a weighted average interest rate of 4.04% and a quarterly Bermudan call feature. Two additional borrowings totaling $6.6 million and $7.8 million were outstanding at December 31, 2012 and 2011 respectively. These borrowings were obtained in 2008 to fund various real estate loans. These borrowings have fixed rates with an average weighted interest rate of 4.07%, with monthly principal and interest through 2018.

A letter of credit for $7.0 million was issued in 2008 and a letter of credit for $3.0 million was issued in 2010 to the Treasury Board of Virginia for collateral on public funds. No draws on the letters of credit have been issued. The letters of credit are considered draws on our Federal Home Loan Bank line of credit which is secured by a blanket lien on residential real estate loans.

 

NOTE 19 LEGAL CONTINGENCIES:

Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

 

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NOTE 20 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.

Financial instruments whose contract amount represents credit risk were as follows:

 

(Dollars are in thousands)    2012      2011  

Commitments to extend credit

   $ 27,887       $ 29,004   

Standby letters of credit

     2,721         3,049   

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

 

NOTE 21 TRUST PREFERRED SECURITIES AND DEFERRAL OF INTEREST PAYMENTS:

On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2. The proceeds of the funds were used for general corporate purposes, which include capital management for affiliates and the acquisition of two branch banks. The securities have a floating rate of 3 month LIBOR plus 177 basis points, which resets quarterly, with a current rate at December 31, 2012 of 2.11%.

On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I. The proceeds of the funds were used for general corporate purposes which included capital management for affiliates, retirement of indebtedness and other investments. The securities have a floating rate of 3 month LIBOR plus 260 basis points, which resets quarterly, with a current rate at December 31, 2012 of 2.94%.

Under the terms of the subordinated debt transactions, 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 up to certain limits.

In October 2009, a restriction to pay dividends from the Bank to the Company was issued by the Federal Reserve Bank of Richmond. As a result, dividends on trust preferred securities issued by the Company shall be deferred until such restriction is removed. This deferral is for a period of 60 months, and could potentially continue until the 1st quarter of 2015. Dividends in arrears on the trust preferred securities were $1.5 million and $993 thousand as of December 31, 2012 and 2011, respectively and are included in accrued interest payable on the balance sheets.

 

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NOTE 22 CAPITAL:

Capital Requirements and Ratios

The Company and the Bank are subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2012, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2012 the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Company’s and Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table as of December 31, 2012 and 2011, respectively.

 

     Actual     Minimum Capital
Requirement
    Minimum to Be Well
Capitalized Under Prompt
Corrective Action
Provisions
 

(Dollars are in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2012:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 57,894         13.51     34,291         8   $ N/A         N/A   

The Bank

     55,315         12.88     34,353         8     42,941         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     49,530         11.56     17,146         4     N/A         N/A   

The Bank

     49,806         11.60     17,176         4     25,765         6

Tier 1 Capital to Average Assets:

               

The Company

     49,530         7.05     28,092         4     N/A         N/A   

The Bank

     49,806         7.08     28,120         4     35,150         5

December 31, 2011:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 45,856         9.15     40,104         8   $ N/A         N/A   

The Bank

     53,070         10.56     40,189         8     50,236         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     32,941         6.57     20,052         4     N/A         N/A   

The Bank

     46,641         9.28     20,095         4     30,142         6

Tier 1 Capital to Average Assets:

               

The Company

     33,461         4.23     31,658         4     N/A         N/A   

The Bank

     46,641         5.99     31,160         4     38,950         5

 

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Conversion of Notes to Common Stock and Warrants

In December, 2010, the Company borrowed $250,000 from Director Scott White for one year. The note bore interest at the variable rate of interest equal to the Wall Street Journal prime rate payable at maturity or conversion, was unsecured and was convertible into the Company’s common stock under certain conditions. In January, 2011, the Company received an additional $250,000 loan from Director Lynn Keene on identical terms. The purpose of these borrowings was to provide cash for operating expenses of the Company. On March 16, 2011 Directors Keene and White loaned the Company an additional $4.95 million which, after receiving regulatory approval, the Company used to retire its indebtedness to the FDIC as receiver for Silverton Bank. The loans had a stated maturity of December 31, 2011 with the same terms as the previous notes. In each case, the Company was obligated to convert the debt into the Company’s common stock if, before the stated maturity, the Company conducted an offering of its common stock at the price per share at which it was offered. If the Company did not conduct an offering prior to the stated maturity, the Company had the option, but not the obligation, to convert the debt into shares of its common stock within 30 days of the stated maturity at a price per share to be established by the Company’s Board of Directors. On December 21, 2011, with regulatory approval the Company consolidated the earlier loans into a loan in the principal amount of $2.8 million from Director White and $2.65 million from Director Keene on the same terms as the previous loans except that the maturity date of the borrowings was extended to June 30, 2012. Prior to their maturity, the maturity of the loans was extended to December 31, 2012 on the same terms. The Company believes this indebtedness was on more favorable terms to the Company than could be obtained from unrelated parties.

On September 19, 2012, in conjunction with the public offering of its common stock, the Company converted both notes to common stock and Mr. White received 1,959,889 shares and Mr. Keene received 1,854,630 shares. Each director also obtained warrants that are immediately exercisable to purchase common stock over the next five years at a price of $1.75 per share. Mr. White received 391,977 warrants and Mr. Keene received 370,926 warrants. These conversions were made on the same terms as the public offering as required by the notes. All warrants issued are detachable from the common stock and are therefore considered a separate security. Accordingly, accounting standards require that the proceeds of the offering be allocated between common stock and the warrants based on fair value. The value of the warrants were determined using the Black-Scholes Option Pricing Model. The assumptions used in the model were a risk free rate of return of .70%, an expected term of five years, a dividend rate of zero, and volatility of 88%.

As a result of this noncash transaction, the Company recorded a $5.7 million increase to stockholders’ equity and reduced other borrowings by $5.45 million and accrued interest payable by $272 thousand. The $5.7 million increase to stockholders’ equity was allocated by an increase of $7.6 million to common stock, $663 thousand allocated to the common stock warrants, and a decrease of $2.6 million to additional paid in capital.

Issuance of Common Stock and Warrants

On December 20, 2012 the Company successfully completed a public offering of its common stock for $1.50 per share. Under the terms of the offering, for every five shares purchased, the buyer received a warrant to purchase one share of common stock. As a result 8,040,838 shares of common stock and 1,607,997 warrants were issued. The warrants are immediately exercisable to purchase common stock over the next five years at a price of $1.75 per share. All warrants issued are detachable from the common stock and are therefore considered a separate security. Accordingly, accounting standards require that the proceeds of the offering be allocated between common stock and the warrants based on fair value. The value of the warrants were determined using the Black-Scholes Option Pricing Model. The assumptions used in the model were a risk free rate of return of ..72%, an expected term of five years, a dividend rate of zero, and volatility of 88%. The $11.4 million increase to stockholders’ equity was allocated by an increase of $16.1 million to common stock, $1.4 million allocated to the common stock warrants, and a decrease of $6.0 million to additional paid in capital, which includes $624 thousand in expenses related to the public offering.

Common Stock Warrants

As summary of common stock warrants outstanding at December 31, 2012 follows:

 

Expiration Date

   Exercise Price      Number
Outstanding And
Exerciseable
     Weighted Average
Remaining
Contractrual Life
 

September 19, 2017

   $ 1.75         762,903         4.72 years   

December 20, 2017

   $ 1.75         1,607,997         4.97 years   
     

 

 

    

 

 

 

Totals

        2,370,900         4.89 years   
     

 

 

    

 

 

 

 

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NOTE 23 FAIR VALUES:

ASC 820,“Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establishes fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

Investment Securities Available for Sale – Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $49.6 million and $32.4 million at December 31, 2012 and 2011, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Loans – The Company does not record loans at fair value on a recurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. From time to time a loan is considered impaired and an allowance for loan losses is established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the impaired loan as nonrecurring Level 3. The aggregate carrying amount of impaired loans carried at fair value were $59.3 million and $85.8 million at December 31, 2012 and 2011, respectively.

Foreclosed Assets – Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $13.9 million and $15.1 million at December 31, 2012 and 2011, respectively.

 

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Assets and liabilities measured at fair value are as follows as of December 31, 2012 (for purpose of this table the impaired loans are shown net of the related allowance):

 

(Dollars are in thousands)    Quoted market
price in active
markets
(Level 1)
     Significant other
observable  inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 23,637       $ —     

Mortgage backed securities

     —           25,978         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           13,869   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           30,688   

Construction and land development

     —           —           4,375   

Residential 1-4 family

     —           —           9,561   

Multifamily

     —           —           2,500   

Farmland

     —           —           9,442   

Commercial

     —           —           2,501   

Agriculture

     —           —           154   

Consumer installment loans

     —           —           109   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 49,615       $ 73,199   
  

 

 

    

 

 

    

 

 

 

Assets and liabilities measured at fair value are as follows as of December 31, 2011 (for purpose of this table the impaired loans are shown net of the related allowance):

 

(Dollars are in thousands)    Quoted market
price in active
markets
(Level 1)
     Significant other
observable  inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 21,633       $ —     

Taxable municipals

     —           1,552         —     

Tax-exempt municipals

     —           1,054         —     

Mortgage backed securities

     —           8,195         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           15,092   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           43,321   

Construction and land development

     —           —           8,769   

Residential 1-4 family

     —           —           13,642   

Multifamily

     —           —           613   

Farmland

     —           —           13,951   

Commercial

     —           —           4,737   

Agriculture

     —           —           714   

Consumer installment loans

     —           —           28   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 32,434       $ 100,867   
  

 

 

    

 

 

    

 

 

 

 

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For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

   Fair Value at
December 31,
2012
    

Valuation Technique

  

Significant Unobservable Inputs

  

Significant
Unobservable
Input Value

Impaired Loans

   $ 59,330      

Appraised Value/Discounted Cash Flows/Market Value of Note

  

Appraisals and/or sales of comparable properties/Independent quotes

   n/a

Other Real Estate Owned

   $ 13,869      

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

  

Appraisal and/or sales of comparable properties/Independent quotes/bids

   n/a

Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2012 and 2011. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments during the months of December 2012 and 2011.

 

                   Fair Value Measurements  

(Dollars are in thousands)

   Carrying
Amount
     Fair
Value
     Quoted
market price
in active
markets
(Level 1)
     Significant
other
observable
inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

December 31, 2012

              

Financial Instruments – Assets

              

Net Loans

   $ 505,553       $ 507,358       $ —         $ 448,028       $ 59,330   

Financial Instruments – Liabilities

              

Time Deposits

     372,473         375,784         —           375,784         —     

FHLB Advances

     6,558         6,558         —           6,558         —     

December 31, 2011

              

Financial Instruments – Assets

              

Net Loans

   $ 579,436       $ 588,888       $ —         $ 503,113       $ 85,775   

Financial Instruments – Liabilities

              

Time Deposits

     445,658         451,312         —           451,312         —     

FHLB Advances

     17,983         17,756         —           17,756         —     

 

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NOTE 24 RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a Troubled Debt Restructuring (“TDR”). The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. The new guidance was effective for the Company beginning January 1, 2012 and did not have a material effect on the Company’s TDR determinations.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by Accounting Standards Update 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company on January 1, 2012 and had no effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements except for expanded disclosures.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. The amendment had no material effect on the financial statements.

The FASB amended the Comprehensive Income topic of the ASC in February 2013. The amendment addresses reporting of amounts reclassified out of accumulated other comprehensive income. Specifically, the amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendment does require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendment will be effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. Early adoption is permitted. The Company does not expect this amendment to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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NOTE 25 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:

CONDENSED BALANCE SHEETS

AS OF DECEMBER 31, 2012 AND 2011

(Dollars in Thousands)

 

     2012     2011  

ASSETS

    

Due from banks

   $ 4,589      $ 211   

Investment in subsidiaries

     53,166        51,854   

Other assets

     667        2,224   
  

 

 

   

 

 

 

Total Assets

   $ 58,422      $ 54,289   
  

 

 

   

 

 

 

LIABILITIES

    

Accrued interest payable

   $ 1,484      $ 1,138   

Accrued expenses and other liabilities

     576        2,332   

Other borrowed money

     —          5,450   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     18,556        25,416   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock – $2.00 par value, 50,000,000 shares authorized; 21,865,535 and 10,010,178 shares issued and outstanding at December 31, 2012 and 2011, respectively

     43,731        20,020   

Common stock warrants

     2,056        —     

Additional paid capital

     13,081        21,689   

Retained deficit

     (19,409     (13,085

Accumulated other comprehensive income

     407        249   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     39,866        28,873   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 58,422      $ 54,289   
  

 

 

   

 

 

 

CONDENSED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

(Dollars in Thousands)    2012     2011  

Income

    

Miscellaneous income

   $ 15      $ 14   

Undistributed loss of subsidiaries

     (5,847     (7,375
  

 

 

   

 

 

 

Total loss

     (5,832     (7,361

Expenses

    

Other borrowed money interest expense

     128        194   

Trust preferred securities interest expense

     490        436   

Legal fees

     61        51   

Accounting fees

     155        68   

Other operating expenses

     63        (150
  

 

 

   

 

 

 

Total Expenses

     897        599   
  

 

 

   

 

 

 

Loss before Income Taxes

     (6,729     (7,960

Income Tax Expense (Benefit)

     (405     950   
  

 

 

   

 

 

 

Net Loss

   $ (6,324   $ (8,910
  

 

 

   

 

 

 

 

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Table of Contents

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

 

(Dollars and Shares in Thousands)    2012     2011  

Cash Flows From Operating Activities

    

Net Loss

   $ (6,324   $ (8.910

Adjustments to reconcile net income to net cash provided by (used) in operating activities:

    

Income of subsidiaries

     5,847        7,375   

Net change in:

    

Other assets

     1,556        1,247   

Other liabilities

     (1,138     (2
  

 

 

   

 

 

 

Net Cash Used in Operating Activities

     (59     (290

Cash Flows From Investing Activities

    

Investment in subsidiary

     (7,000     —     
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (7,000     —     

Cash Flows From Financing Activities

    

Issuance of common stock and common stock warrants

     11,437        —     

Proceeds from (repayments on) line of credit

     —          (4,900

Proceeds from other borrowings

     —          5,200   
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     11,437        300   

Net Increase in Cash and Cash Equivalents

     4,378        10   

Cash and Cash Equivalents, Beginning of year

     211        201   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Year

   $ 4,589      $ 211   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Year for:

    

Interest

   $ —        $ 50   

Taxes

   $ —        $ —     

Supplemental Disclosure of Non Cash Transactions:

    

Conversion of Director notes in other borrowings to common stock

   $ 5,450      $ —     

Conversion of accrued interest payable on Director notes to common stock

   $ 272      $ —     

Common stock issued as a result of the conversion of Director notes

   $ 5,722      $ —     

 

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NOTE 26 SELECTED QUARTERLY INFORMATION (UNAUDITED)

 

     2012 QUARTERS  
(Dollars in thousands except per share data)    Fourth      Third     Second     First  

Income statement

         

Net interest income

   $ 6,732       $ 6,763      $ 6,653      $ 7,125   

Noninterest income

     1,140         1,355        1,634        1,467   

Provision for credit losses

     707         967        1,176        1,950   

Noninterest expense

     6,911         7,838        8,252        8,987   

Net income (loss)

     212         (1,463     (2,538     (2,535

Earnings (loss) per share, basic

     0.07         (0.14     (0.25     (0.25

Earnings (loss) per share, fully diluted

     0.07         (0.14     (0.25     (0.25

Period end balance sheet

         

Total loans and leases

   $ 522,363       $ 538,992      $ 554,103      $ 573,752   

Total assets

     719,015         708,217        725,615        768,447   

Total deposits

     652,850         653,217        669,337        699,085   

Total shareholders’ equity

     39,866         28,118        23,718        26,170   

 

     2011 Quarters  
(Dollars in thousands except per share data)    Fourth     Third     Second     First  

Income statement

        

Net interest income

   $ 8,162      $ 7,742      $ 8,089      $ 8,170   

Noninterest income

     1,615        1,364        1,234        1,311   

Provision for credit losses

     1,701        2,801        2,312        1,145   

Noninterest expense

     13,079        9,113        9,617        7,613   

Net income (loss)

     (5,952     (1,832     (1,675     549   

Earnings (loss) per share, basic

     (0.59     (0.18     (0.17     0.05   

Earnings (loss) per share, fully diluted

     (0.59     (0.18     (0.17     0.05   

Period end balance sheet

        

Total loans and leases

   $ 597,816      $ 629,610      $ 664,003      $ 683,025   

Total assets

     780,384        810,355        821,107        864,665   

Total deposits

     708,315        731,989        741,153        782,411   

Total shareholders’ equity

     28,873        34,686        36,480        38,086   

 

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

 

Item 9A. Controls and Procedures

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of New Peoples Bankshares, Inc. New Peoples’ internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting practices.

All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of New Peoples’ internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework.” Based on this assessment management concluded that the internal control over financial reporting was effective as of December 31, 2012.

Changes in Internal Control Over Financial Reporting

There have been no changes in our 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.

Disclosure Controls and Procedures

We maintain 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, we carried out an evaluation, under the supervision and with the participation of our 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of December 31, 2012.

 

Item 9B. Other Information

None.

 

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Table of Contents

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information contained under the captions “Election of Directors,” “Executive Officers Who Are Not Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2013 Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by reference.

 

Item 11. Executive Compensation

The information contained under the captions “Director Compensation” and “Executive Compensation and Related Party Transactions” in the 2013 Proxy Statement that is required to be disclosed in this Item 11 is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information contained under the captions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in the 2013 Proxy Statement that is required to be disclosed in this Item 12 is incorporated herein by reference.

 

Item 13. Certain Relationships, Related Transactions and Director Independence

The information contained under the caption “Executive Compensation and Related Party Transactions” and “Corporate Governance” in the 2013 Proxy Statement that is required to be disclosed in this Item 13 is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services

The information contained under the caption “Audit Information” in the 2013 Proxy Statement that is required to be disclosed in this Item 14 is incorporated herein by reference.

 

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Table of Contents
Item 15. Exhibits and Financial Statement Schedules

 

(a)(1)   The response to this portion of Item 15 is included in Item 8 above.
(a)(2)   The response to this portion of Item 15 is included in Item 8 above.
(a)(3)   The following exhibits are filed as part of this Form 10-K, and this list includes the exhibit index::

 

Exhibit

Number

     
    3.1    Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).
    3.2    Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to Form 8-K filed April 15, 2004).
    4.1    Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
    4.2    Form of Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
    4.3    Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
  10.1*    New Peoples Bank, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001).
  10.2*    Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed November 30, 2004)
  10.3*    Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed November 30, 2004).
  10.4*    Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
  10.5*    First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
  10.6*    Letter Agreement, dated as of June 29, 2009, between the Company and Kenneth D. Hart (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).
  10.7    Written Agreement, effective August 4, 2010, by and among New Peoples Bankshares, Inc., New Peoples Bank, Inc., the Federal Reserve Bank of Richmond and the State Corporation Commission Bureau of Financial Institutions (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 6, 2010).
  10.8    Engagement Letters of Scott & Stringfellow, LLC (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
  10.9    Convertible Note Payable, B. Scott White, dated June 27, 2012 (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 29, 2012).
  10.10    Convertible Note Payable, Harold Lynn Keene, dated June 27, 2012 (incorporated by reference to Exhibit 10.2 to Form 8-K filed June 29, 2012).
  14    Code of Ethics (incorporated by reference to Exhibit 14 to Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
  21    Subsidiaries of the Registrant.
  23    Consent of Elliott Davis, LLC.
  24    Powers of Attorney (contained on signature page).
  31.1    Certification by Chief Executive Officer pursuant to Rule 13a-14(a).
  31.2    Certification by Chief Financial Officer pursuant to Rule 13a-14(a).
  32    Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101    The following materials for the Company’s 10-K Report for the year ended December 31, 2012, formatted in XBRL. (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text (1)

 

* Denotes management contract.
(1)

Furnished, not filed.

 

(b)    See Item 15(a)(3) above.
(c)    See Items 15(a)(1) and (2) above.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ JONATHAN H. MULLINS

  Jonathan H. Mullins
  President and Chief Executive Officer
Date:   March 19, 2013
By:  

/s/ C. TODD ASBURY

  C. Todd Asbury
  Executive Vice President and Chief Financial Officer
Date:   March 19, 2013

POWER OF ATTORNEY

Each of the undersigned hereby appoints Jonathan H. Mullins and C. Todd Asbury, and each of them, as attorneys and agents for the undersigned, with full power of substitution, in his name and on his behalf as a director of New Peoples Bankshares, Inc. (the “Registrant”), to act and to execute any and all instruments as such attorneys or attorney deem necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, and any rules, regulations, policies or requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the preparation and filing with the Commission of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “Report”), and any and all amendments to such Report, together with such other supplements, statements, instruments and documents as such attorneys or attorney deem necessary or appropriate.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

Signature

  

Capacity

 

Date

/s/ JONATHAN H. MULLINS

Jonathan H. Mullins

   President, Chief Executive Officer and Director (Principal Executive Officer)   March 19, 2013

/s/ C. TODD ASBURY

C. Todd Asbury

   Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   March 19, 2013

/s/ TIM BALL

Tim Ball

   Director   March 19, 2013

/s/ JOE CARTER

Joe Carter

   Director   March 19, 2013

/s/ JOHN D. COX

John D. Cox

   Chairman, Director   March 19, 2013

/s/ CHARLES H. GENT

Charles H. Gent

   Director   March 19, 2013

/s/ EUGENE HEARL

Eugene Hearl

   Director   March 19, 2013

/s/ HAROLD LYNN KEENE

Harold Lynn Keene

   Director   March 19, 2013

/s/ MICHAEL G. MCGLOTHLIN

Michael G. McGlothlin

   Director   March 19, 2013

/s/ FRED MEADE

Fred Meade

   Director   March 19, 2013

/s/ B. SCOTT WHITE

B. Scott White

   Director   March 19, 2013

 

70