10-K 1 d310048d10k.htm FORM 10-K 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, 2011

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 $5.00 per share on the last business day of the second quarter of 2011 was $44,876,692.

The number of shares outstanding of the registrant’s common stock was 10,010,178 as of February 27, 2012.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:

None.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

PART I

     
        Item 1.    Business    3
        Item 1A.    Risk Factors    13
        Item 1B.    Unresolved Staff Comments    13
        Item 2.    Properties    13
        Item 3.    Legal Proceedings    13
        Item 4.    Mine Safety Disclosures    14

PART II

     
        Item 5.   

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

   14
        Item 6.    Selected Financial Data    14
        Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
        Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    32
        Item 8.    Financial Statements and Supplementary Data    33
        Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    71
        Item 9A.    Controls and Procedures    71
        Item 9B.    Other Information    72

PART III

     
        Item 10.    Directors, Executive Officers and Corporate Governance    72
        Item 11.    Executive Compensation    75
        Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    80
        Item 13.    Certain Relationships, Related Transactions and Director Independence    81
        Item 14.    Principal Accounting Fees and Services    82

PART IV

     
        Item 15.    Exhibits, Financial Statement Schedules    85
SIGNATURES    86


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. New Peoples subsidiaries include: New Peoples Bank, Inc., a Virginia banking corporation (the Bank) and NPB Web Services, Inc., a web design and hosting company (NPB Web). In July 2004, NPB Capital Trust I was formed for the issuance of trust preferred securities. In September 2006, NPB Capital Trust 2 was formed for the issuance of trust preferred securities. NPB Financial Services, Inc., an insurance and investment services corporation (NPB Financial) was a subsidiary of New Peoples until January 1, 2009 when it became a subsidiary of the Bank. Upon change of ownership the Bank formed a division doing business as New Peoples Bank Financial Services which offers investment services through its broker dealer relationship with LPL Financial Services, Inc. The subsdiary, NPB Financial, 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 27 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 counties of Sullivan and Washington. 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. and NPB Web Services, Inc.

NPB Financial is a full-service insurance agency, dealing in personal and group life, health, and disability products, and fixed rate annuities. However, the Bank, through its division New Peoples Bank Financial services, offers 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.

 

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Branch Locations

We initially opened with full service branches in Honaker and Weber City, Virginia and in 1999 opened a full service branch in Castlewood, Virginia. During 2000, we opened full service branches in Haysi and Lebanon, Virginia. During 2001, we opened branches in Pounding Mill, Virginia and Princeton, West Virginia. In 2002, we opened branch offices in Gate City, Clintwood, Big Stone Gap, Tazewell and Davenport, Virginia. During 2003, we expanded into Grundy, Dungannon, and Bristol, Virginia. We expanded into Tennessee and opened an office in Bloomingdale, Tennessee in 2003, as well. In 2004, we opened offices in Richlands, Abingdon, and Bristol, Virginia. In 2005 full service branches were opened in Bluefield and Cleveland, Virginia. During 2006, we opened full service branches in Esserville, Pound, and Lee County, Virginia and Jonesborough, Tennessee. During 2007, we opened full service offices in Bland, and Chilhowie, Virginia; and Bramwell, West Virginia. We purchased two operating branches from another bank, including deposits and loans located in Norton and Pennington Gap, Virginia in June 2007. During 2008, we opened one full service office in Bluewell, West Virginia. During 2010, as part of an initiative by the Board and Management to reduce operating expenses, we closed our offices in Bramwell, West Virginia and Cleveland, Davenport, and Dungannon, Virginia.

In order to open additional banking offices, we must obtain prior regulatory approval which takes into account a number of factors, including, among others, a determination that we have adequate capital and a finding that the public interest will be served.

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.

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.

Education is a priority in workplace preparedness and the Tri-State area places great emphasis on educating our regional workforce for today and jobs of the future. Starting in elementary school, students are exposed to technology resources, distance learning, robotics and math competitions, as well as STEM programs-Science, Technology, Engineering and Math. The Tri-State Area is home to numerous higher education institutions including East Tennessee State University, The University of Virginia’s College at Wise, Bluefield State College, Appalachia School of Law, Appalachia School of Pharmacy, and various private colleges and community colleges.

Educational Highlights include:

 

   

FastTrack software programming, IT help desk training, and advanced manufacturing technology training offered by Mountain Empire and Southwest Virginia community colleges.

 

   

The University of Virginia’s College at Wise, the only four-year branch of the University of Virginia, offers the state’s only undergraduate software engineering degree, one of a handful of such programs nationally.

 

   

IT, professional development and leadership training are offered at the Southwest Virginia Technology Development Center, also operated by The University of Virginia’s College at Wise.

 

   

Undergraduate and graduate degree programs are offered at the Southwest Virginia Higher Education Center in Abingdon.

 

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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.

Internet Site

In March 2001, we opened our internet banking site at www.newpeoplesbank.com. The site includes a customer service area that contains branch and ATM locations, product descriptions and current interest rates offered on deposit accounts. Customers with internet access can access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.

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 limits provided thereunder.

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.

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.

 

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

 

 

     December 31,  
     2011     2010     2009     2008     2007  

Commercial, financial and agricultural

     14.35     15.48     15.56     15.26     17.77

Real estate – construction

     5.42     7.39     9.41     8.96     5.63

Real estate – mortgage

     73.79     69.13     66.02     67.04     67.87

Installment loans to individuals

     6.44     8.00     9.01     8.74     8.73
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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.

 

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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, 2010, 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 – 30.55%, Scott County, VA – 37.96%, Dickenson County, VA – 28.29%, Tazewell County, VA – 9.05%, Smyth County, VA – 3.49%, Lee County, VA – 6.25%, Buchanan County, VA – 8.90%, Wise County, VA – 9.08%, city of Norton, VA – 18.00%, Bland County, VA – 27.89%, combined Washington County, VA and the City of Bristol, VA – 2.85%, Mercer County, WV – 9.19%, City of Kingsport, TN – 0.98%, and City of Jonesborough, TN – 4.76%.

Employees

As of December 31, 2011, we had 312 total employees, of which 301 were full-time employees. None of our employees is covered by a collective bargaining agreement, and we consider relations with employees to be excellent.

 

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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 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

 

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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. During the year ended December 31, 2009 the Bank declared and paid dividends to New Peoples totaling $500 thousand in order to service debt obligations. However, in October 2009, the Federal Reserve Bank of Richmond (“Richmond FRB”) restricted the Bank from paying dividends to the Company. 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, 2011, the Bank was “well capitalized,” with a Total Capital ratio of 10.56%; a Tier 1 Capital ratio of 9.28%; and a leverage ratio 5.99%.

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. Our Company’s size and no on-balance sheet foreign exposure excludes us from the requirements of Basel III. However, we anticipate that the Dodd-Frank Act may impose higher capital standards at a future date in time.

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.

 

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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.

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.

 

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The Bank also requires business partners with whom it shares such information to 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.

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 the EESA, the U.S. Treasury was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. 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.

American Recovery and Reinvestment Act of 2009. The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate governance obligations on all current and future TARP Capital Purchase Program recipients until the institution has redeemed the preferred stock, which TARP Capital Purchase Program recipients are now permitted to do under the ARRA without regard to the three year holding period and without the need to raise new capital, subject to approval of its primary federal regulator. Because we did not participate in TARP, we are not affected by these changes.

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.

 

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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.

 

Item 1A. Risk Factors

Not applicable.

 

Item 1B. Unresolved Staff Comments

Not applicable.

 

Item 2. Properties

At December 31, 2011, the Company’s net investment in premises and equipment in service was $3 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 27 full service branches. The owned properties in Virginia are located in Abingdon, Big Stone Gap, Bluefield, Bland, Bristol, Castlewood, Chilhowie, Clintwood, Gate City, Grundy, Haysi, Honaker, Jonesville, Lebanon, Norton, Pennington Gap, Pound, Pounding Mill, Richlands, Tazewell, and Weber City. Offices in Princeton, West Virginia and Bloomingdale and Jonesborough, Tennessee are also owned by the Bank.

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.

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. Management and Bank’s counsel believe VFI’s position is not supported by law or the facts presented.

 

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Item 4. Mine Safety Disclosures

Not applicable.

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” beginning July 12, 2011. 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.

 

     2011      2010  
     High      Low      High      High  

1st quarter

   $ 10.00       $ 4.00       $ 10.00       $ 6.67   

2nd quarter

     5.00         5.00         10.00         6.00   

3rd quarter

     3.00         3.00         10.00         6.00   

4th quarter

     3.00         3.00         8.00         4.00   

The most recent sales price of which management is aware was $3.00 per share on February 6, 2012.

 

(b) Holders

On February 24, 2012, there were approximately 4,431 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 2012. See Note 3, Note 16 and Note 23 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 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;

 

   

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;

 

   

our ability to attract additional talent we may need;

 

   

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.

For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward looking statements, please see Item 1A – Risk Factors herein.

 

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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, 2011 and 2010 as well as results of operations for the years ended December 31, 2011 and 2010. 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, 2011, we believe we have made good progress in our compliance efforts under the Agreement and 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.

 

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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 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.

A newly revised strategic plan for the years 2012 through 2014 was completed and submitted to the regulators in November 2011. The 2012 Budget was submitted to our regulators also in the fourth quarter of 2011.

 

  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.

The credit analysis function has been restructured and is a part of credit administration. The credit analysis function and independent appraisal reviews are now lead by a former seasoned lender who serves as Vice President and Credit Officer. This individual oversees a staff of four credit analysts and a certified licensed appraiser who serves as Appraisal Review Manager. The credit analysts review new and renewed loan relationships of $250 thousand or more prior to approval and annually reviews relationships of $500 thousand or more. The independent Appraisal Review Manager 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 have engaged them to perform this function in 2012. 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

 

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  Assets department which reports to the Chief Credit Officer. Presently, the department has four 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. 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 monthly 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 and 2011 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.

 

  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, 2011, total assets were $780.4 million, total loans were $597.8 million, and total deposits were $708.3 million at December 31, 2011. The Company had a total net loss after tax of $8.9 million or $0.89 per basic share and per diluted share for the year ended December 31, 2011 as compared to a net loss of $9.1 million, or $0.91 per basic and per diluted share for the year ended December 31, 2010. The annualized return on average assets for the fiscal year 2011 was (1.07)% as compared to (1.05)% for the same period in 2010. The annualized return on average equity was (24.35)% for the fiscal year 2011 and (19.60)% for the same period in 2010.

During the year 2011, we strategically decreased total assets, total loans and higher cost deposits to improve our capital position. As a result of shrinking the Bank, we returned to well-capitalized status in the first quarter of 2011 and have maintained that status throughout the year. The following Bank ratios existed at December 31, 2011 as compared to December 31, 2010, respectively: Tier 1 leverage ratio of 5.99% versus 6.00%; Tier 1 risk based capital ratio of 9.28% versus 8.50%; and total risk based capital ratio of 10.56% versus 9.79%.

Total assets decreased $72.2 million in 2011, or 8.47%, from $852.6 million at December 31, 2010. Total loans decreased $110.0 million in 2011, or 15.54%, from $707.8 million at December 31, 2010. This is primarily the result of our strategy to shrink the loan portfolio to improve our capital position, the slow economic recovery, particularly in our market area and more stringent underwriting guidelines that we have established. Total deposits decreased $57.8 million, or 7.54%, from $766.1 million at December 31, 2010. The largest decrease in deposits has taken place in time deposits which have decreased from $510.1 million at December 31, 2010 to $445.7 million at December 31, 2011. This $64.4 million decrease in time deposits, or 12.63%, is due to our shift in pricing these deposits to the middle of the pricing in our market area versus the higher end where we have traditionally been when we were experiencing high loan growth.

For the year ending December 31, 2011, we experienced a net loss of $8.9 million as compared to $9.1 million for the same period in 2010. In the year 2011, the net loss was primarily related to four areas: lower net interest income, increased other real estate owned expenses, a one-time goodwill impairment loss and a valuation allowance on our deferred tax asset. We maintain a strong net interest margin of 4.29% in 2011 as compared to 4.35% in 2010. However, the decreased volume of earning assets in 2011 and high levels of nonperforming assets

 

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decreased net interest income to $32.2 million in 2011 from $34.1 million in 2010. Other real estate owned expenses also increased in 2011 to $5.6 million from $2.2 million. The majority of this is due to decreased real estate market value primarily in out of market loans originated in the past. We also determined that our goodwill is more likely than not to be totally impaired at December 31, 2011 due to our decreased stock price. In addition, this goodwill was determined to be more likely than not to be impaired due to the decreased capital levels that we have experienced because of historical losses. This $4.1 million expense is a one-time expense. Finally, we incurred a valuation allowance on our deferred tax asset totaling $2.7 million which has a direct impact on the net loss in 2011. 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.

The ratio of nonperforming assets to total assets is 7.55% at December 31, 2011 as compared to 7.02% at December 31, 2010. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, were nearly the same level for both years. At December 31, 2011, nonperforming assets totaled $58.9 million as compared to $59.8 million at December 31, 2010. The majority of these assets are real estate development projects both inside and outside of our market area. Ones outside our market area are primarily in the coastal Carolinas; however, this amount is only $2.5 million at December 31, 2011 as compared to $7.6 million at December 31, 2010. In addition, there are also some similar projects located in Northeastern Tennessee and one in eastern West Virginia. We are undertaking aggressive efforts to work out these credits. This will take some time, but overall we believe we are making progress.

During 2011, we have made significant progess in identifying the risks in our loan portfolio. In addition, we have improved our lending policies and further trained 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, 2011 is $18.4 million, or 3.07% as compared to $25.0 million, or 3.53% at December 31, 2010. The provision for loan losses decreased to $ 8.0 million in 2011 as compared to $22.3 million in 2010. 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 continued increases in non-performing loans and believe that this level is adequate. Future provisions may be deemed necessary, however. Net charge-offs year-to-date for 2011 as a percentage of total average loans were 2.24% as compared to 2.14% in 2010. Impaired loans increased slightly to $91.8 million with an estimated allowance of $6.0 million for potential losses at December 31, 2011 as compared to $90.6 million in impaired loans with an estimated allowance of $12.8 million at the end of 2010. In working with our customers, troubled debts restructured increased in 2011 to $29.1 million as compared to $13.9 million at December 31, 2010.

New Peoples Bankshares, Inc. and its subsidiary New Peoples Bank, Inc. has 27 branch locations throughout Southwest Virginia, southern West Virginia, and northeastern Tennessee providing traditional banking, investment and insurance services to its customers.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policy relates to our provision for loan losses, which reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to 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. 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 $2.0 million, or 5.76% from 2010 to 2011. The decrease in net interest income is due primarily to a reduction in loans during 2011 and the level of nonearning assets, i.e. nonaccrual loans and other real estate owned properties. Loan interest income decreased $6.6 million, or 13.81%, from $47.8 million in 2010 to $41.2 million in 2011. Interest expense decreased $4.3 million, or 30.88%, from $13.9 million for the year ending 2010 to $9.6 million in 2011 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, 2011 was 4.29% as compared to 4.35% for the same period in 2010. The net interest margin, however, was trending upward during the last half of 2011.

 

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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, 2011
    For the Year Ended
December 31, 2010
    For the Year Ended
December 31, 2009
 
     Average
Balance
    Income/
Expense
     Yields/
Rates
    Average
Balance
    Income/
Expense
     Yields/
Rates
    Average
Balance
    Income/
Expense
     Yields/
Rates
 

ASSETS

                     

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

   $ 659,298      $ 41,176         6.25   $ 742,026      $ 47,775         6.44   $ 747,971      $ 50,188         6.71

Federal funds sold

     6,202        9         0.15     25,763        44         0.17     10,648        26         0.24

Interest bearing deposits

     74,000        184         0.25     8,349        12         0.14     124        —           —  

Other investments (3)

     10,952        400         3.65     7,590        197         2.61     7,134        164         2.30
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Earning Assets

     750,452        41,769         5.57     783,728        48,028         6.13     765,877        50,378         6.57
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: Allowance for loans losses

     (20,805          (18,607          (10,245     

Non-earning assets

     101,972             97,997             87,531        
  

 

 

        

 

 

        

 

 

      

Total Assets

   $ 831,619           $ 863,118           $ 843,163        
  

 

 

        

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

                  

Deposits

                     

Demand – Interest bearing

   $ 57,675      $ 155         0.27   $ 56,791      $ 250         0.44   $ 39,384      $ 233         0.59

Savings

     103,346        460         0.45     92,622        779         0.84     84,215        994         1.18

Time deposits

     485,072        7,717         1.59     523,990        11,112         2.12     522,439        15,491         2.97

Other Borrowings

     24,151        838         3.47     29,721        1,303         4.39     30,937        1,312         4.24

Trust Preferred Securities

     16,496        436         2.64     16,496        454         2.75     16,496        533         3.23
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     686,740        9,606         1.40     719,620        13,898         1.93     693,471        18,563         2.68
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     102,957             92,943             95,372        

Other liabilities

     5,338             4,307             4,278        
  

 

 

        

 

 

        

 

 

      

Total Liabilities

     795,035             816,870             793,121        

Stockholders’ Equity

     36,584             46,248             50,042        
  

 

 

        

 

 

        

 

 

      

Total Liabilities and Stockholders’ Equity

   $ 831,619           $ 863,118           $ 843,163        
  

 

 

        

 

 

        

 

 

      

Net Interest Income

     $ 32,163           $ 34,130           $ 31,815      
    

 

 

        

 

 

        

 

 

    

Net Interest Margin

          4.29          4.35          4.14
       

 

 

        

 

 

        

 

 

 

Net Interest Spread

          4.17          4.20          3.89
       

 

 

        

 

 

        

 

 

 

 

(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)

 

     2011 Compared to 2010     2010 Compared to 2009  
     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

   $ (5,326   $ (1,273   $ (6,599   $ (399   $ (2,014   $ (2,413

Federal funds sold

     (33     (2     (35     37        (19     18   

Interest bearing deposits

     94        78        172        —          12        12   

Other investments

     87        116        203        10        23        33   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Earning Assets

     (5,178     (1,081     (6,259     (352     (1,998     (2,350
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Bearing Liabilities:

            

Demand

     4        (99     (95     103        (86     17   

Savings

     90        (409     (319     99        (314     (215

All other time deposits

     (825     (2,570     (3,395     46        (4,425     (4,379

Other borrowings

     (244     (221     (465     (52     43        (9

Trust Preferred Securities

     —          (18     (18     —          (79     (79
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Interest Bearing Liabilities

     (975     (3,317     (4,292     196        (4,861     (4,665
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in Net Interest Income

   $ (4,203   $ 2,236      $ (1,967   $ (548   $ 2,863      $ 2,315   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

Our primary source of income comes from interest earned on loans receivable. Loan production slowed in 2011 as evidenced by total loans decreasing $110.0 million, or 15.54%, including net charge offs of $14.7 million. This is the result of slower loan demand, intentional shrinking of the loan portfolio to increase regulatory capital ratios, and resolution of problem loans. We continue to serve our customers, and although the total loan portfolio has shrunk, we have renewed existing credits and made new loans as well to qualified borrowers. We plan to decrease the loan portfolio in the near future as we reduce our exposure to certain risks and decrease nonperforming loans. Total loans decreased $55.8 million in 2010 from 2009. A schedule of loans by type is set forth immediately below. Approximately 79.20% of the loan portfolio is secured by real estate at the end of 2011.

Loans receivable outstanding are summarized as follows:

Loan Portfolio

 

     December 31,  
(Dollars in thousands)    2011      2010      2009      2008      2007  

Commercial, financial and agricultural

   $ 85,798       $ 109,418       $ 118,844       $ 110,060       $ 121,198   

Real estate – construction

     32,389         52,307         71,854         64,595         38,420   

Real estate – mortgage

     441,107         489,314         504,071         483,471         463,079   

Installment loans to individuals

     38,522         56,755         68,801         63,048         59,563   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 597,816       $ 707,794       $ 763,570       $ 721,174       $ 682,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Our loan maturities as of December 31, 2011 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

   $ 27,056       $ 48,493       $ 10,249       $ 85,798   

Real estate – construction

     7,694         18,270         6,425         32,389   

Real estate – mortgage

     91,915         249,729         99,463         441,107   

Installment loans to individuals

     7,140         27,953         3,429         38,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 133,805       $ 344,445       $ 119,566       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans with fixed rates

   $ 43,934       $ 118,553       $ 117,568       $ 280,055   

Loans with variable rates

     89,871         225,892         1,998         317,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 133,805       $ 344,445       $ 119,566       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

 

The above table reflects the earlier of the maturity or re-pricing dates for loans at December 31, 2011. 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, internal factors, such as internal practices and lending procedures, and external factors, such as general economic conditions.

The allowance for loan losses decreased to $18.4 million at December 31, 2011 as compared to $25.0 million at December 31, 2010. The allowance for loan losses at the end of 2011 was approximately 3.07% of total loans as compared to 3.53% at the end of 2010. Net loans charged off for 2011 were $14.7 million, or 2.24% of average loans, and $15.9 million, or 2.14% of average loans, in 2010. The provision for loan losses was $8.0 million for 2011 as compared with $22.3 million for 2010.

Certain risks exist in the Bank’s loan portfolio. Historically, we have experienced significant annual loan growth until the past couple of years. However, there might be loans that have single pay maturities or demand loans that may be too new to have exhibited signs of weakness. Also, past expansions into new markets increase potential credit risk. 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. The recent negative trends in the national real estate market and economy pose threats to our portfolio. 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. National real estate markets have experienced a more significant downturn and this has impacted our portfolio for certain out-of-market loans in the Coastal Carolina, northeastern Tennessee, and eastern West Virginia markets. Prior to 2008, we had purchased participation construction loans in the Coastal Carolina area. The totals of these credits were $2.5 million at December 31, 2011 and $7.6 million at December 31, 2010. At December 31, 2011 $55 thousand of the allowance for loan losses was allocated to these credits. The $5.1 million decrease in these credits was the result of a $1.8 million charge off on a subdivision property and golf course, a $1.4 million payoff on a hotel property which experienced a $428 thousand charge off in 2011, and a total of $1.3 million in charge offs due to new appraised values obtained in 2011 for three development properties. This market area poses higher risk to potential future write-downs if the real estate market conditions do not show improvements. 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 if these industries experience a significant downturn although we do not believe this to be likely at least in the near future. We consider these factors to be the primary higher risk characteristics of the loan portfolio.

 

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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 years 2010 and 2011, we engaged a third party loan review firm to conduct quarterly loan reviews and have engaged them to perform this function in 2012. 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.

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 obtaining an appraisal. We consider an appraisal to be outdated when the appraisal is greater than 12 months old and the credit exhibits signs of weakness that warrant the possibility of relying on the collateral for repayment. An independent appraisal department reviews each appraisal to ensure compliance with USPAP requirements. The appraisal is further reviewed by the loan officer and Chief Credit Officer for reasonableness. If the appraisal value is questionable, an independent third party review of the appraisal is obtained. On adversely classified loans of all types, we may deem it necessary to obtain appraisals annually. In the past year, we have given higher priority to construction and development and commercial real estate loans as they are more sensitive to market deterioration. Concentrated efforts through the Special Assets division on these problem credits are underway and current appraisals are being obtained on a timely basis as required. If appraisals are obtained “as is,” we further discount the appraisals with an estimated selling cost of 10% for commercial and development properties and 6% for residential mortgages. If a current appraisal has not been obtained, we generally discount the most recent appraisal value by age: greater than one year through two years – 10%; two years to three years – 20%; greater than 3 years – 30%. For distressed out of market loans, we compare the credit to a similar current appraisal and discount accordingly until a current appraisal is obtained. In determining the FAS 5 component of our allowance, 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 FAS 114. 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 increased to $91.8 million with a valuation allowance of $6.0 million at December 31, 2011 as compared to $90.6 million with a valuation allowance of $12.8 million at December 31, 2010. Of the $91.8 million recorded as impaired loans, $33.9 million were nonperforming loans, which includes nonaccrual loans and past due 90 days or more. Impaired loans increased $1.2 million, or 1.29%, from $90.6 million recorded as impaired loans at December 31, 2010. We determined we had $30.0 million in loans that required a valuation allowance of $6.0 million at December 31, 2011. At December 31, 2010 we had $45.7 million in loans that required a valuation allowance of $12.8 million. The $15.7 million decrease in loans requiring a valuation allowance was the result of $5.0 million decrease in commercial loans, $2.0 million increase in real estate loans, and a decrease of $12.6 million in real estate construction loans that required a valuation allowance. Management is aggressively working to reduce the impaired credits at minimal loss.

 

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Although risk classifications and the level of downgrades may indicate a worsening of the asset quality of the loan portfolio, we believe that the enhancements we have made in the risk identification process that we have implemented through improved policies, quality external independent loan reviews, new credit administration and experience from the severe recession support a better demonstration of the loan portfolio than in the past. The corresponding allowance for loan loss at December 31, 2011 decreased from December 31, 2010. This is a result of the following factors. The allowance for loan loss increased at December 31, 2010 significantly due to subsequent events in 2011 that revealed exposures resulting primarily from updated appraisals obtained on out of market loans that were significantly devalued and were later charged off in 2011. The level of out of market loans have drastically declined and development loans have also decreased; therefore, the risk associated with them has reduced requiring lesser reserves. In addition, 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. This is due to the fact that we did not have any historical loss rates for certain types of loans in time past, but now a loss trend has developed and provides better support than the previous methodology. Management implemented the following internal control procedures for timely reporting of changes in collateral value on impaired loans to management responsible for financial reporting:

 

  1. A Disclosure Control Committee has been established consisting of the following officers: Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, Chief Operating Officer, Senior Lending Officer, Controller, In-house Legal Counsel, and Director of Internal Audit. This Committee will meet quarterly to discuss loan portfolio and problem asset quality issues, operation risks, legal issues, subsequent events, suspicious activities, and reported disclosures.

 

  2. The Chief Credit Officer (“CCO”) of the Bank is assigned the responsibility for monitoring all assets classified as impaired. The CCO is responsible for determining when appraisals or evaluations will be needed on impaired loans and other real estate owned properties, and for reporting any reductions in collateral values to the Chief Financial Officer (“CFO”) on a quarterly basis prior to the filing of the quarterly and annual reports with the SEC. Our other real estate owned property department maintains a tickler of when new appraisals are to be obtained. Appraisals subject to annual review are ordered on or about the first of the month preceding the month of annual renewal. For those that have an annual renewal due in the month following quarter end or year end, the appraisal is ordered two months prior to the reporting period end to help ensure timely receipt of appraisals and reduce the likelihood of an appraisal being obtained in the subsequent event period prior to the public filing of financial information.

 

  3. When appraisals are received from the third party appraisal firm, a copy of the appraisal is promptly logged on a register designating the date of receipt by our independent appraisal review department which presently consists of a certified licensed appraiser. The appraisal is provided to the Loan Officer and the Loan Operations Department, with the Loan Officer responsible to promptly place the appraisal in the customer file, update valuations on the Bank’s database, provide the information to the ALLL model coordinator for an impairment analysis and forward a copy to the CCO.

 

  4. The independent appraisal review department of the Bank will immediately notify the CCO and the Loan Officer of the results of an appraisal on an impaired or suspected impaired loan or other real estate owned property. After the CCO and Loan Officer review the appraisal, a determination will be made as to the reasonableness of the appraisal. The final determination as to reasonableness will be the responsibility of the CCO. All appraisals of loans greater than $2.0 million are reviewed by a third-party appraisal review company. Upon a determination of reasonableness, then the CCO will notify the CFO, Controller and Allowance for Loan Loss model coordinator of any deterioration in the appraised value. A new impairment test will be performed and reviewed by the CCO and CFO to determine if an additional allowance reserve is needed for this credit relationship, which will be provided to the Controller to make general ledger adjustments and financial statement revisions prior to issuance.

 

  5. Prior to release of financial information, the CFO will contact the CCO to ensure no appraisals have been received or are being reviewed, the result of which might be material to the financial statement of the Company. If there are any material differences, a collaborative effort of Senior Management and the independent appraisal reviewer will be made to determine what the impairment in the ALLL needs to be for recognition or the write-down in OREO value that is needed for the period end currently being reported to the public.

 

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Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present higher risks. At December 31, 2011, there were 170 loans in non-accrual status totaling $42.3 million, or 7.08% of total loans. At December 31, 2010, there were 113 loans in non-accrual status totaling $45.8 million, or 6.47% of total loans. The amounts of interest that would have been recognized on these loans were $1.3 million and $1.2 million in the years 2011 and 2010, respectively. There were 47 loans past due 90 days or greater and still accruing interest totaling $1.5 million, or 0.25% of total loans at December 31, 2011. There were 66 loans past due 90 days or greater and still accruing interest totaling $1.7 million in 2010. 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 $29.1 million in loans classified as troubled debt restructurings as of December 31, 2011 as compared to $13.9 million in loans classified as troubled debt restructurings as of December 31, 2010. We do not have any commitments to lend additional funds to non-performing debtors. Following is a summary of non-accrual and past due loans greater than 90 days still accruing interest:

Non-Accrual and Past Due Loans

(Dollars in thousands)

 

     December 31,  
     2011     2010     2009     2008     2007  

Non-accruing loans

          

Commercial, financial and agricultural

   $ 10,633      $ 5,970      $ 1,027      $ 100      $ 1,250   

Real estate – construction

     5,583        15,460        13,727        2,875        351   

Real estate – mortgage

     26,099        22,986        9,670        3,269        1,128   

Installment loans to individuals

     1        1,365        289        170        217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-accruing loans

     42,316        45,781        24,713        6,414        2,946   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans past due 90 days or more and still accruing

     1,504        1,693        3,875        33        267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 43,820      $ 47,474      $ 28,588      $ 6,447      $ 3,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total loans

     7.33     6.71     3.74     0.89     0.47

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 used. 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    2011     2010     2009     2008     2007  

Beginning Balance

   $ 25,014      $ 18,588      $ 6,904      $ 6,620      $ 4,870   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision charged to expense

     7,959        22,328        12,841        1,500        3,840   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Advances made on loans with off balance sheet provision

     153        —          —          —          —     

Loan Losses:

          

Commercial, financial and agricultural

     (4,022     (1,911     (129     (591     (1,701

Real estate - construction

     (7,245     (10,002     (446     (44     (2

Real estate – mortgage

     (5,446     (3,867     (367     (256     (179

Installment loans to individuals

     (694     (728     (334     (420     (284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loan losses

     (17,407     (16,508     (1,276     (1,311     (2,166
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

          

Commercial, financial and agricultural

     224        530        37        18        20   

Real estate – construction

     1,296        —          8        —          —     

Real estate - mortgage

     1,018        6        21        17        6   

Installment loans to individuals

     123        70        53        60        50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     2,661        606        119        95        76   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge offs

     (14,746     (15,902     (1,157     (1,216     (2,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at End of Period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge offs as a % of average loans

     2.79     2.14     0.15     0.17     0.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans. The allocation of the allowance as shown in the following table should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.

 

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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 52% of the allowance to real estate loans, which constituted 73.79% of our loan portfolio at December 31, 2011. 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 21% of the allowance to real estate construction loans, which constituted 5.42% of our loan portfolio at December 31, 2011. 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 remained comparable to the 20% in 2010 despite the fact construction loans decreased $19.9 million from 2010 to 2011 due to the $7.2 million in charge offs that impacts our historical loss rate.

We have allocated 18% of the allowance to commercial loans, which constituted 14.35% of our loan portfolio at December 31, 2011. This allocation decreased as a percentage of the allowance for loan losses as a result of the $23.8 million decrease in commercial loans during 2011.

We have allocated 4% of the allowance to consumer installment loans, which constituted 6.44% of our loan portfolio at December 31, 2011. The reason for the decrease in the allocation was the result of the $18.1 million decrease in these loans during 2011.

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, 2007 through December 31, 2011

(Dollars in thousands)

 

     December 31, 2011     December 31, 2010     December 31, 2009  
     Amount      % of
ALLL
    %of
Loans
    Amount      % of
ALLL
    %of
Loans
    Amount      % of
ALLL
    % of
Loans
 

Commercial

   $ 3,322         18     14.35   $ 5,323         21     15.48   $ 1,710         9     15.56

R/E – const.

     3,848         21     5.42     4,913         20     7.39     8,036         43     9.41

R/E – mortg.

     9,578         52     73.79     6,882         27     69.13     3,525         19     66.02

Installment

     781         4     6.44     1,733         7     8.00     1,501         8     9.01

Unallocated

     851         5       6,163         25       3,816         21  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 18,380         100     100.00   $ 25,014         100     100.00   $ 18,588         100     100.00
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     December 31, 2008     December 31, 2007  
     Amount      % of
ALLL
    % of
Loans
    Amount      % of
ALLL
    % of
Loans
 

Commercial

   $ 3,866         56     15.26   $ 3,254         49     17.76

R/E – const.

     621         9     8.96     199         3     5.63

R/E – mortg.

     1,036         15     67.04     1,200         18     67.88

Installment

     1,381         20     8.74     1,967         30     8.73

Unallocated

     —           —            —           —       
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 6,904         100     100.00     6,620         100     100.00
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other Real Estate Owned

Other real estate owned increased $2.8 million, or 22.24%, to $15.1 million at December 31, 2011 from $12.3 million at December 31, 2010. 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 2011, we were able to sale $5.9 million of our properties as compared to sales of $3.7 million in 2010. 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 2011 we had to record writedowns on other real estate owned properties in the amount of $4.0 million compared to $1.4 million in 2010. Substantially all of the $4.0 million in writedowns was related to a $1.2 million writedown on a commercial subdivision property located in Pigeon Forge, Tennessee and a $2.1 million writedown on a commercial subdivision property located in the Coastal Carolina area.

 

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Investment Securities

Total investment securities increased to $32.4 million at December 31, 2011 from $4.7 million at December 31, 2010 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 $15.7 million and $892 thousand at December 31, 2011 and 2010, 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 increasing the size of the portfolio during 2012. 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,    2011      2010  

Available for Sale

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

U.S. Government Agencies

   $ 21,405       $ 21,633       $ 3,001       $ 2,970   

Taxable municipals

     1,465         1,552         894         899   

Tax-exempt municipals

     1,043         1,054         —           —     

Mortgage backed securities

     8,144         8,195         781         789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 32,057       $ 32,434       $ 4,676       $ 4,658   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, fair value and weighted average yield of investment securities at December 31, 2011 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

     171         176         2.59

Due after five years through fifteen years

     8,377         8,615         3.11

Due after fifteen years

     23,509         23,643         2.59
  

 

 

    

 

 

    

 

 

 

Total

   $ 32,057       $ 32,434         2.72
  

 

 

    

 

 

    

 

 

 

Deposits

Total deposits were $708.3 million at December 31, 2011, a decrease of $57.8 million, or 7.54%, from $766.1 million at December 31, 2010. 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 this econcomic recession period, we have decreased our interest rates on deposits consistent with our local market mid-range levels, given that loan demand has waned in the past couple of years and the need for funding has decreased. As a result, savings deposits, which includes money market deposits, have decreased as well. We have, however, focused on increasing demand deposits through our attractive consumer and commercial deposit accounts. As a result, demand deposits have increased $20.2 million, or 13.68%, to $168.1 million at December 31, 2011 as compared to $147.9 million at December 31, 2010.

Time deposits of $100,000 or more equaled approximately 23.61% of deposits at the end of 2011 and 22.89% of deposits at the end of 2010.

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

 

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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 $8.2 million in 2011 as compared to $17.0 million in 2010 primarily due to lower interest rates offered by us.

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

Maturities of Time Deposits of $100 Thousand and More

(Dollars in thousands)

December 31, 2011

 

Three months or less

   $ 39,494   

Over three months through six months

     31,062   

Over six months through twelve months

     40,480   

Over one year

     56,203   
  

 

 

 

Total

   $ 167,239   
  

 

 

 

Noninterest Income

Noninterest income decreased $410 thousand, or 6.91%, from $5.9 million in 2010 to $5.5 million in 2011. The primary reasons for the decrease is from $136 thousand decrease in insurance commissions, a $122 thousand decrease in bank owned life insurance income and a $252 thousand difference in the gain on sale of fixed assets. Service charges and fees increased in 2011 from 2010. Service charges on deposit accounts, primarily overdraft fees, decreased $213 thousand, while fees on ATM and debt card network fees increased $328 thousand due to increased volume.

Noninterest income as a percentage of average assets remained relatively the same. The ratio was 0.66% in 2011 as compared to 0.69% in 2010. We anticipate this percentage to remain flat during 2012 due to regulatory actions regarding these types of income sources.

Noninterest Expense

Noninterest expenses increased $7.5 million, or 23.60%, to $39.4 million in 2011 from $31.9 million in 2010. Following are explanations of the increase.

Management evaluates goodwill for impairment on an annual basis as of November 30. On that date, the most recent trade in the Company’s common stock was $3 per share. Based on this market value, we determined goodwill was not impaired. However, subsequent to December 31, 2011 we became aware of a trade in the Company’s stock at $1.50 per share. Based on this information, we determined that it was appropriate under generally accepted accounting standards to re-evauate goodwill for impairment. Based on this reassessment, at the end of 2011, we determined goodwill was more likely than not impaired. This determination was made based on the estimated fair value of the assets and liabilities of the Company. In addition, our capital levels have continued to decrease in the past three years as we have sustained periods of net losses. Also, our assets and liabilities are being priced more in line with market interest rates versus a higher interest rate that we have been able to offer in the past. We anticipate fair values of our assets and liabilities to match more closely to tangible book values resulting in less fair value of capital, as well. These factors in aggregate, are the reasons management determined goodwill was impaired and as a result, a one-time non-recurring expense of $4.1 million was realized in 2011.

Other real estate owned and repossessed vehicle expenses increased $3.4 million, or 155.47%, to $5.6 million in 2011 from $2.2 million in 2010. The increase is related to a decrease in real estate market values resulting in write-downs and an increase in foreclosures and repossessions in 2011. We re-assessed the values of the properties in other real estate owned in 2011 and wrote down these assets by $4.0 million to reflect fair market value changes in the properties since the original date that the assets were acquired in 2010 or the prior year balance for properties that continue to be held. In the year 2011, we had a net loss on the sale of other real estate owned property of $218 thousand compared to a net loss of $202 thousand in 2010.

These two factors are the primary reasons that non-interest expenses increased in 2011.

Salaries and employee benefits increased from $15.0 million in 2010 to $15.7 million in 2011. In the year 2010, there was a net reduction of total salaries totaling $358 thousand related to the reversal of an accrual salary continuation for a former bank executive. The one time reversal was realized in 2010 and not in 2011; therefore, the change in retirement contribution expenses increased year-to-year by $413 thousand. In addition, total salaries

 

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increased $187 thousand in the year 2011. Although we have had a reduction in full-time equivalent employees in 2011, there was an increase in higher compensated employees needed for asset quality improvement. In December 2011, we had a 10% reduction in force and we expect approximately $1.0 million in cost savings in the year 2012 as a result of this reduction.

In 2011, FDIC assessment expense decreased $408 thousand, or 16.85%, from $2.4 million in 2010 to $2.0 million in 2011. This is the result of a decrease in the assessment base that became effective in April 2011 and also a reduction of total deposits in 2011.

Other operating expenses decreased $360 thousand, or 6.31%, to $5.3 million in 2011 from $5.7 million in 2010. The decrease is primarily related to decreased professional fees incurred from legal and consultant fees during 2011. These fees decreased as most of these expenses were associated with initial compliance of the Written Agreement entered into during 2010. In addition, in 2010 a non-recurring $483 thousand reserve for the remaining available funds on an under-collateralized construction line of credit was expensed due to the possibility of providing additional funding to the customer to complete the construction project and minimize other losses. We anticipate the other noninterest expense to remain flat or slightly decrease in 2012 as we engage fewer consultants and we realize cost savings from improving operational efficiencies.

The ratio of noninterest expense as a percentage of average assets slightly increased in 2011 to 4.74% as compared to 3.70% in 2010. 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 104.61% in 2011 as compared to 79.28% for 2010 primarily the result of increased nointerest expenses related to goodwill impairment and other real estate owned expenses.

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. The total cash surrender value of the policies was $11.4 million and $11.0 million at December 31, 2011 and December 31, 2010, respectively. Total income for the policies during 2011 was $340 thousand as compared to $462 thousand for the year ending 2010.

Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a deferred tax asset of $7.2 million existed at December 31, 2011 as compared to a deferred tax asset of $8.0 million at December 31, 2010. The $800 thousand difference is primarily related to a $2.7 million valuation allowance recognized in 2011. 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 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. The net impact of these deferrals are not expected to be realized in a three year period in accordance with generally accepted accounting principles; consequently, a valuation allowance was recorded and expensed in the current year. 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.

Capital Resources

Our total capital at the end of 2011 was $28.9 million compared to $37.5 million in 2010. The decrease was $8.7 million, or 23.05%. The Bank had fallen below well capitalized status, as defined by the capital guidelines of bank regulations, at the end of 2010, but returned to well capitalized at the end of the first quarter of 2011 and thereafter. New Peoples capital as a percentage of total assets was 3.70% at December 31, 2011 compared to 4.40% at December 31, 2010. The decrease in New Peoples capital is due to the net loss incurred in 2011 primarily the result of the goodwill impairment, other real estate owned writedowns, and the valuation allowance on deferred taxes.

New Peoples did not apply to participate in the federal Troubled Asset Relief Program, or TARP, funds as we thought participation might not be in the best long-term interest of our stockholders.

 

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Total assets decreased in 2011 and we anticipate further decreasing assets to be the trend in 2012. Our primary source of capital comes from retained earnings. We developed a new strategic plan and capital plan in 2011. Under current economic conditions, we believe it is prudent 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. These options we are fully implementing to increase capital. However, these efforts alone may not provide us adequate capital if further loan losses are realized. We are exploring a common stock offering.

We currently have two outstanding borrowings totaling $5.45 million plus accrued interest to two directors. The maturity date of these notes has been extended to June 30, 2012. The Company is obligated to convert the debt into the Company’s common stock if, before the stated maturity, the Company conducts an offering of its common stock on the same terms, including price, on which it is offered. If the Company does not conduct an offering prior to the stated maturity, the Company has 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. Additional capital at the Company level may be obtained upon New Peoples election to convert the notes to common stock.

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 $86.3 million at December 31, 2010 to $107.3 million at December 31, 2011. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2012.

At December 31, 2011, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $16.7 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 $4.7 million at December 31, 2010 to $32.4 million at December 31, 2011. This was partially the result of the Federal Reserve Bank requiring in the third quarter of 2011 that we pledge $13.0 million in securities or loans for our overnight payment processing. We elected to purchase securities to serve as the collateral for the pledging requirements. In addition, our strategy is to develop an investment portfolio for the Bank. We foresee purchasing additional securities in the near future as opportunities arise.

Our loan to deposit ratio was 84.40% at December 31, 2011 and 92.39% at year end 2010. We anticipate this ratio to remain below 90% as we continue to decrease our loan portfolio throughout 2012. 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, 2011 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, 2011, we had borrowings from the Federal Home Loan Bank totaling $18.0 million as compared to $24.2 million at December 31, 2010. The $6.2 million decrease was due to a $5.0 million term note which matured in January 2011 and we paid off this note with liquid funds and the remaining $1.2 million decrease was due to regularly scheduled principal payments. Of these borrowings at December 31, 2011, none are overnight and subject to daily interest rate changes. Term notes of $10.2 million mature in the year 2012 and we anticipate paying these off as liquidity is available to do so. Two additional borrowings totaling $7.8 million have a maturity date in the year 2018, but reduce in principal amounts monthly. 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 $17.6 million was available on December 31, 2011 on the $45.6 million line of credit which is secured by a blanket lien on our residential real estate loans.

 

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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, we borrowed $500 thousand from two directors at $250 thousand each. One borrowing occurred at the end of 2010 and the other in January 2011. These funds were used to meet current liquidity needs of the Company. At December 31, 2010, the Company had a $4.9 million line of credit from Silverton Bank (then in FDIC receivership) that was scheduled to come due in June 2011. On March 16, 2011 we received additional borrowings from two directors totaling $4.95 million and were able to retire the Silverton line since management had been unable to locate another source of repayment. We continue to work on enhancing the Company’s liquidity. At the end of December 2011, we obtained regulatory approval to extend these director notes until June 30, 2012.

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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

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

A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2011 and 2010 is as follows:

 

(Dollars in thousands)    2011      2010  

Financial instruments whose contract amounts represent credit risk:

     

Commitments to extend credit

   $ 29,004       $ 32,165   

Standby letters of credit

     3,049         4,787   

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

 

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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, 2011, we had a negative cumulative gap rate sensitivity ratio of 38.82% for the one year re-pricing period, compared to 38.98% at December 31, 2010. 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, 2011

(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

   $ 71,916      $ 62,106      $ 230,757      $ 113,471      $ 93,990      $ 25,576      $ 597,816   

Federal funds sold

     77        —          —          —          —          —          77   

Deposits with banks

     72,170        —          —          —          —          —          72,170   

Investments

     8,146        —          2,070        2,134        8,615        15,538        36,503   

Bank owned life insurance

     11,351        —          —          —          —          —          11,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

   $ 163,660      $ 62,106      $ 232,827      $ 115,605      $ 102,605      $ 41,114      $ 717,917   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sources of funds:

              

Interest Bearing DDA

   $ 58,459      $ —        $ —        $ —        $ —        $ —        $ 58,459   

Savings & MMDA

     94,569        —          —          —          —          —          94,569   

Time Deposits

     114,403        205,089        53,176        70,410        2,580        —          445,658   

Trust preferred securities

     16,496        —          —          —          —          —          16,496   

Other borrowings

     5,450        10,000        —          —          7,983        —          23,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

   $ 289,377      $ 215,089      $ 53,176      $ 70,410      $ 10,563      $ —        $ 638,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discrete Gap

   $ (125,717   $ (152,983   $ 179,651      $ 45,195      $ 92,042      $ 41,114      $ 79,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative Gap

   $ (125,717   $ (278,700   $ (99,049   $ (53,854   $ 38,188      $ 79,302     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Cumulative Gap as % of Total Earning Assets

     (17.51 )%      (38.82 )%      (13.80 )%      (7.50 )%      5.32     11.05  

 

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  

Reports of the Independent Registered Public Accounting Firms

     34   

Consolidated Balance Sheets December 31, 2011 and 2010

     38   

Consolidated Statements of Operations – Years Ended December 31, 2011 and 2010

     39   

Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2011 and 2010

     40   

Consolidated Statements of Cash Flows – Years Ended December 31, 2011 and 2010

     41   

Notes to Consolidated Financial Statements

     42   

 

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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 sheet of New Peoples Bankshares, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2011. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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. as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2012 expressed an unqualified opinion.

 

/S/ ELLIOTT DAVIS, LLC

      CERTIFIED PUBLIC ACCOUNTANTS

Galax, Virginia

February 29, 2012

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

New Peoples Bankshares, Inc.

Honaker, Virginia

We have audited the internal control over financial reporting of New Peoples Bankshares, Inc. and subsidiaries (the “Company”) as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of New Peoples Bankshares, Inc. as of December 31, 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended and our report expressed an unqualified opinion.

 

/S/ ELLIOTT DAVIS, LLC

CERTIFIED PUBLIC ACCOUNTANTS

Galax, Virginia

February 29, 2012

 

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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 sheet of New Peoples Bankshares, Inc. as of December 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. New Peoples Bankshares, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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. as of December 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), New Peoples Bankshares, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2011 (except for the effects of the material weakness described in paragraphs six and seven of that report, as to which the date is June 23, 2011) expressed an adverse opinion.

 

/S/  BROWN, EDWARDS AND COMPANY, L. L. P.

       CERTIFIED PUBLIC ACCOUNTANTS

Christiansburg, Virginia

March 11, 2011, except for

Notes 3, 7, 8, 11, 21, 23, 24 and 26,

as to which the date is June 23, 2011

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and

Stockholders of New Peoples Bankshares, Inc.

Honaker, Virginia

We have audited New Peoples Bankshares, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). New Peoples Bankshares, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

In our report dated March 11, 2011, we expressed an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2010, based upon the COSO criteria. The Company has subsequently determined that a deficiency in controls relating to their process and procedures used to estimate the allowance for loan losses and valuation of other real estate owned existed as of the previous assessment date, and has further concluded that such deficiency represented a material weakness as of December 31, 2010. As a result, management revised its assessment, as presented in the accompanying Management’s Report on Internal Control Over Financial Reporting, to conclude that the Company’s internal control over financial reporting was not effective as of December 31, 2010. Accordingly, our opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, as expressed herein, is different from that expressed in our previous report.

A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. The Company’s management identified a material weakness in internal control over financial reporting relating to their process and procedures used to estimate the allowance for loan losses. This material weakness resulted in the restatement of the Company’s annual consolidated financial statements as of and for the year ended December 31, 2010.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, New Peoples Bankshares, Inc. has not maintained effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have not audited the changes in internal control discussed in Management’s Report on Internal Control over Financial Reporting which have been made in an effort to remediate the identified material weakness.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related consolidated statements of operations, stockholders’ equity, and cash flows of New Peoples Bankshares, Inc. as of and for the year ended December 31, 2010. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the Company’s 2010 consolidated financial statements and this report does not affect our report dated March 11, 2011 except for Notes 3, 7, 8, 11, 21, 23, 24 and 26, as to which the date is June 23, 2011, which expressed an unqualified opinion on those consolidated financial statements (as restated).

 

/S/  BROWN, EDWARDS AND COMPANY, L. L. P.
CERTIFIED PUBLIC ACCOUNTANTS

Christiansburg, Virginia

March 11, 2011 (except for the matters discussed

in paragraphs six and seven above, as to which the

date is June 23, 2011)

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2011 AND 2010

(IN THOUSANDS EXCEPT SHARE and SHARE DATA)

 

     2011     2010  

ASSETS

    

Cash and due from banks

   $ 18,306      $ 14,369   

Interest-bearing deposits with banks

     72,170        42,549   

Federal funds sold

     77        25,611   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     90,553        82,529   

Investment Securities available-for-sale

     32,434        4,658   

Loans receivable

     597,816        707,794   

Allowance for loan losses

     (18,380     (25,014
  

 

 

   

 

 

 

Net Loans

     579,436        682,780   

Bank premises and equipment, net

     33,141        34,141   

Equity securities (restricted)

     3,573        3,878   

Other real estate owned

     15,092        12,346   

Accrued interest receivable

     3,067        3,700   

Life insurance investments

     11,351        11,011   

Goodwill and other intangibles

     123        4,346   

Deferred taxes, net

     7,220        8,037   

Other assets

     4,394        5,201   
  

 

 

   

 

 

 

Total Assets

   $ 780,384      $ 852,627   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Demand deposits

    

Noninterest bearing

   $ 109,629      $ 87,839   

Interest-bearing

     58,459        60,022   

Savings deposits

     94,569        108,119   

Time deposits

     445,658        510,100   
  

 

 

   

 

 

 

Total Deposits

     708,315        766,080   

FHLB advances

     17,983        24,183   

Accrued interest payable

     1,796        1,720   

Accrued expenses and other liabilities

     1,471        1,475   

Line of credit borrowing

     —          4,900   

Other borrowings

     5,450        250   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     751,511        815,104   

STOCKHOLDERS’ EQUITY

    

Common stock - $2.00 par value; 50,000,000 shares authorized; and 10,010,178 shares issued and outstanding for 2011 and 2010, respectively

     20,020        20,020   

Additional paid-in-capital

     21,689        21,689   

Retained earnings (deficit)

     (13,085     (4,175

Accumulated other comprehensive income (loss)

     249        (11
  

 

 

   

 

 

 

Total Stockholders’ Equity

     28,873        37,523   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 780,384      $ 852,627   
  

 

 

   

 

 

 

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, 2011 AND 2010

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

 

     2011     2010  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 41,176      $ 47,775   

Federal funds sold

     9        44   

Interest-earning deposits with banks

     184        12   

Investments

     301        111   

Dividends on equity securities (restricted)

     99        86   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     41,769        48,028   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     155        250   

Savings

     460        779   

Time deposits below $100,000

     4,768        7,000   

Time deposits above $100,000

     2,949        4,112   

FHLB advances

     644        1,057   

Other borrowings

     194        246   

Trust Preferred Securities

     436        454   
  

 

 

   

 

 

 

Total Interest Expense

     9,606        13,898   
  

 

 

   

 

 

 

NET INTEREST INCOME

     32,163        34,130   

PROVISION FOR LOAN LOSSES (Note 7)

     7,959        22,328   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     24,204        11,802   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     2,488        2,701   

Fees, commissions and other income

     2,096        2,248   

Insurance and investment fees

     600        523   

Life insurance investment income

     340        462   
  

 

 

   

 

 

 

Total Noninterest Income

     5,524        5,934   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits (Note 14)

     15,735        15,007   

Occupancy and equipment expense

     4,533        4,552   

Advertising and public relations

     445        412   

Data processing and telecommunications

     1,654        1,616   

FDIC Assessment

     2,014        2,422   

Other real estate owned and repossessed vehicles, net

     5,577        2,183   

Impairment of goodwill

     4,122        —     

Other operating expenses

     5,342        5,702   
  

 

 

   

 

 

 

Total Noninterest Expenses

     39,422        31,894   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (9,694     (14,158

INCOME TAX BENEFIT (Note 11)

     (784     (5,093
  

 

 

   

 

 

 

NET LOSS

   $ (8,910   $ (9,065
  

 

 

   

 

 

 

Loss Per Share

    

Basic

   $ (0.89   $ (0.91
  

 

 

   

 

 

 

Fully Diluted

   $ (0.89   $ (0.91
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     10,010,178        10,009,468   

Fully Diluted

     10,010,178        10,009,468   

The accompany notes are an intergral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

(IN THOUSANDS INCLUDING SHARE DATA )

 

     Shares
of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
    Accumu-lated
Other
Compre-hensive
Income (Loss)
    Total
Stockholders’

Equity
    Compre-hensive
Income (Loss)
 

Balance, December 31, 2009

     10,009       $ 20,018       $ 21,683       $ 4,890      $ 28      $ 46,619      $ (3,705

Net Loss

              (9,065       (9,065     (9,065

Unrealized loss (net of deferred tax of $20) on available-for-sale securities

                (39     (39     (39

Stock options exercised

     1         2         6             8     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

     10,010         20,020         21,689         (4,175     (11     37,523        (9,104
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

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

Unrealized gain (Net of deferred tax of $134) on available-for-sale securities

                260        260        260   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     10,010       $ 20,020       $ 21,689       $ (13,085   $ 249      $ 28,873      $ (8,650
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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, 2011 AND 2010

(IN THOUSANDS)

 

     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Loss

   $ (8,910   $ (9,065

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

    

Depreciation

     2,562        2,678   

Provision for Loan Losses

     7,959        22,328   

Impairment of Goodwill

     4,122        —     

Income (less expenses) on Life Insurance

     (340     (462

(Gain) loss on sale of fixed assets

     126        (117

Loss on sale of foreclosed real estate

     218        202   

Adjustment of carrying value of foreclosed real estate

     4,023        1,427   

Accretion of bond premiums/discounts

     70        8   

Deferred tax (benefit) expense

     683        (2,616

Amortization of core deposit intangible

     101        168   

Net change in:

    

Interest receivable

     633        591   

Other assets

     807        (3,790

Accrued interest payable

     76        103   

Accrued expense and other liabilities

     (4     (707
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     12,126        10,748   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     82,453        27,826   

Purchase of securities available-for-sale

     (31,647     (4,656

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

     4,195        2,536   

Sale of Federal Home Loan Bank stock

     305        118   

Payments for the purchase of property and equipment

     (1,921     (2,825

Proceeds from sales of property and equipment

     233        1,082   

Proceeds from sales of other real estate owned

     5,945        3,716   
  

 

 

   

 

 

 

Net Cash Provided by Investing Activities

     59,563        27,797   
  

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

    

Common stock options exercised

     —          8   

Net decrease in line of credit borrowings

     (4,900     —     

Net increase in other borrowings

     5,200        250   

Net change in:

    

Demand deposits

     20,227        16,774   

Savings deposits

     (13,550     17,652   

Time deposits

     (64,442     (29,060

Net decrease in FHLB borrowings

     (6,200     (1,200
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (63,665     4,424   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,024        42,969   

Cash and Cash Equivalents, Beginning of Year

     82,529        39,560   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Year

   $ 90,553      $ 82,529   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Year for:

    

Interest

   $ 9,682      $ 14,001   

Taxes

   $ —        $ 1,259   

Supplemental Disclosure of Non Cash Transactions:

    

Other real estate acquired in settlement of foreclosed loans

   $ 12,932      $ 12,047   

Loans made to finance sale of foreclosed real estate

   $ 1,000      $ 260   

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.

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Consolidation Policy – The consolidated financial statements include the Company, the Bank, NPB Financial 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

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Loans (Continued) – off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and prospects for future contractual payments are reasonably assured.

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 $8.3 million as of December 31, 2011. 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.

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

 

Type

  

Estimated useful life

Buildings    39 years
Paving and landscaping    15 years
Computer equipment and software    3 to 5 years
Vehicles    5 years
Furniture and other equipment    5 to 7 years

Advertising Cost – Advertising costs are expensed in the period incurred.

Stock Options—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.

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Income Taxes – Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. 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, 2011 and 2010. 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 2008 through 2011 are currently open to audit under statutes of limitations by the Internal Revenue Service (“IRS”) and the Virginia Department of Taxation.

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 are determined by the Treasury Method.

For the years ending December 31, 2011 and 2010, 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,
 
   2011      2010  

Net loss available to common shareholders

   $ (8,910)       $ (9,065)   

Weighted average shares outstanding

     10,010,178         10,009,468   
  

 

 

    

 

 

 

Weighted average dilutive shares outstanding

     10,010,178         10,009,468   
  

 

 

    

 

 

 

Basic loss per share

   $ (0.89)       $ (0.91)   

Diluted loss per share

   $ (0.89)       $ (0.91)   

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.

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

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

 

Business Combinations (Continued) – 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, 2011, we believe we have made good 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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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

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 $72.3 million and $68.2 million at December 31, 2011 and 2010, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.

 

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, 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

U.S. Government Agencies

   $ 3,001       $ —         $ 31       $ 2,970   

Taxable municipals

     894         5         —           899   

Mortgage backed securities

     781         8         —           789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 4,676       $ 13       $ 31       $ 4,658   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011 and December 31, 2010.

 

     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, 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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                 

U.S. Government Agencies

   $ 2,970       $ 31       $ —         $ —         $ 2,970       $ 31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011, the available-for-sale portfolio included eleven investments for which the fair market value was less than amortized cost. At December 31, 2010, the available-for-sale portfolio included four 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.

The amortized cost and fair value of investment securities at December 31, 2011, 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

     171         176         2.59

Due after five years through fifteen years

     8,377         8,615         3.11

Due after fifteen years

     23,509         23,643         2.59
  

 

 

    

 

 

    

 

 

 

Total

   $ 32,057       $ 32,434         2.72
  

 

 

    

 

 

    

 

 

 

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 5 INVESTMENT SECURITIES (CONTINUED):

 

Investment securities with a carrying value of $15.7 million and $892 thousand at December 31, 2011 and 2010, 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 $3.6 million and $3.9 million as of December 31, 2011 and 2010, respectively.

 

NOTE 6 LOANS:

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

 

(Dollars are in thousands)    2011      2010  

Real estate secured:

     

Commercial

   $ 170,789       $ 198,259   

Construction and land development

     32,389         52,307   

Residential 1-4 family

     255,998         274,396   

Multifamily

     14,320         16,659   

Farmland

     40,106         49,323   
  

 

 

    

 

 

 

Total real estate loans

     513,602         590,944   

Commercial

     39,327         50,358   

Agriculture

     6,147         9,488   

Consumer installment loans

     38,522         56,755   

All other loans

     218         249   
  

 

 

    

 

 

 

Total loans

   $ 597,816       $ 707,794   
  

 

 

    

 

 

 

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

 

(Dollars are in thousands)    2011      2010  

Real estate secured:

     

Commercial

   $ 19,169       $ 19,655   

Construction and land development

     5,583         15,460   

Residential 1-4 family

     4,829         3,165   

Multifamily

     2,101         166   

Farmland

     5,257         1,909   
  

 

 

    

 

 

 

Total real estate loans

     36,939         40,355   

Commercial

     4,522         4,061   

Agriculture

     854         1,352   

Consumer installment loans

     1         13   

All other loans

     —           —     
  

 

 

    

 

 

 

Total loans receivable on nonaccrual status

   $ 42,316       $ 45,781   
  

 

 

    

 

 

 

Total interest income not recognized on nonaccrual loans for 2011 and 2010 was $1.3 million and $1.2 million, respectively. Total interest income recognized on nonaccrual loans for 2011 and 2010 was $1.1 million and $1.0 million, respectively.

 

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NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 6 LOANS: (CONTINUED):

 

The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2011 and December 31, 2010:

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2010

(Dollars are in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Real estate secured:

        

Commercial

   $ 23,791         24,645         —     

Construction and land development

     8,585         12,594         —     

Residential 1-4 family

     3,347         3,352         —     

Multifamily

     —           —           —     

Farmland

     7,615         7,615         —     

Commercial

     1,646         2,167         —     

Agriculture

     3         3         —     

Consumer installment loans

     —           —           —     

All other loans

     —           —           —     

With an allowance recorded:

        

Real estate secured:

        

Commercial

     13,837         14,006         3,847   

Construction and land development

     14,913         16,253         3,926   

Residential 1-4 family

     4,626         4,626         953   

Multifamily

     510         510         42   

Farmland

     6,993         6,993         627   

Commercial

     3,254         3,254         2,295   

Agriculture

     1,482         1,482         1,120   

Consumer installment loans

     46         46         23   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 90,648       $ 97,546       $ 12,833   
  

 

 

    

 

 

    

 

 

 

The average recorded investment in impaired loans was $63.4 million for the year ended December 31, 2010. Interest income recognized on impaired loans for December 31, 2010 was $4.0 million.

 

48


Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

NOTE 6 LOANS (CONTINUED):

 

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

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2010

(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

   $ 6,331       $ 1,878       $ 9,673       $ 17,882       $ 180,377       $ 198,259       $ 6   

Construction and land development

     556         1,523         8,150         10,229         42,078         52,307         —     

Residential 1-4 family

     9,445         4,374         2,554         16,373         258,023         274,396         1,326   

Multifamily

     61         162         —           223         16,436         16,659         —     

Farmland

     2,512         244         810         3,566         45,757         49,323         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans