Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

 

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number: 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, Virginia

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

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

n/a

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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 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   ¨    Smaller reporting company   x

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

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

 

Class

 

Outstanding at November 12, 2013

Common Stock, $2.00 par value   21,872,293

 

 

 


Table of Contents

NEW PEOPLES BANKSHARES, INC.

INDEX

 

         Page  

PART I

 

FINANCIAL INFORMATION

     2   

Item 1.

 

Financial Statements

     2   
 

Consolidated Statements of Income (Loss) – Nine Months Ended September 30, 2013 and 2012 (Unaudited)

     2   
 

Consolidated Statements of Income (Loss) – Three Months Ended September 30, 2013 and 2012 (Unaudited)

     3   
 

Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

     4   
 

Consolidated Balance Sheets – September 30, 2013 (Unaudited) and December 31, 2012

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2013 and 2012 (Unaudited)

     6   
 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2013 and 2012 (Unaudited)

     7   
 

Notes to Consolidated Financial Statements

     8   

Item 2.

 

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

     24   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     33   

Item 4.

 

Controls and Procedures

     33   

PART II

 

OTHER INFORMATION

     34   

Item 1.

 

Legal Proceedings

     34   

Item 1A.

 

Risk Factors

     34   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3.

 

Defaults upon Senior Securities

     34   

Item 4.

 

Mine Safety Disclosures

     34   

Item 5.

 

Other Information

     34   

Item 6.

 

Exhibits

     34   

SIGNATURES

     35   


Table of Contents
Part I Financial Information

 

Item 1 Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2013     2012  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 21,757      $ 24,784   

Federal funds sold

     2        2   

Interest-earning deposits with banks

     146        131   

Investments

     612        653   

Dividends on equity securities (restricted)

     94        83   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     22,611        25,653   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     69        81   

Savings

     161        177   

Time deposits below $100,000

     1,676        2,364   

Time deposits above $100,000

     1,184        1,589   

FHLB Advances

     186        403   

Other borrowings

     —          128   

Trust Preferred Securities

     349        370   
  

 

 

   

 

 

 

Total Interest Expense

     3,625        5,112   
  

 

 

   

 

 

 

NET INTEREST INCOME

     18,986        20,541   

PROVISION FOR LOAN LOSSES

     550        4,093   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER

    

PROVISION FOR LOAN LOSSES

     18,436        16,448   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     1,684        1,834   

Fees, commissions and other income

     2,085        1,742   

Insurance and investment fees

     253        260   

Net realized gains on sale of investment securities

     99        385   

Life insurance investment income

     92        235   
  

 

 

   

 

 

 

Total Noninterest Income

     4,213        4,456   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     9,991        10,496   

Occupancy and equipment expense

     3,148        3,231   

Advertising and public relations

     273        325   

Data processing and telecommunications

     1,323        1,323   

FDIC insurance premiums

     1,141        1,244   

Other real estate owned and repossessed vehicles, net

     1,390        4,387   

Other operating expenses

     3,853        4,071   
  

 

 

   

 

 

 

Total Noninterest Expenses

     21,119        25,077   
  

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     1,530        (4,173

INCOME TAX EXPENSE (BENEFIT)

     (9     2,363   
  

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 1,539      $ (6,536
  

 

 

   

 

 

 

Income (Loss) Per Share

    

Basic

   $ 0.07      $ (0.64
  

 

 

   

 

 

 

Fully Diluted

   $ 0.07      $ (0.64
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     21,870,240        10,177,237   
  

 

 

   

 

 

 

Fully Diluted

     21,870,240        10,177,237   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

2


Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2013      2012  

INTEREST AND DIVIDEND INCOME

     

Loans including fees

   $ 7,134       $ 7,989   

Federal funds sold

     1         1   

Interest-earning deposits with banks

     43         36   

Investments

     220         212   

Dividends on equity securities (restricted)

     30         28   
  

 

 

    

 

 

 

Total Interest and Dividend Income

     7,428         8,266   
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     

Demand

     20         27   

Savings

     45         57   

Time deposits below $100,000

     538         707   

Time deposits above $100,000

     381         477   

FHLB Advances

     60         72   

Other borrowings

     —           40   

Trust Preferred Securities

     119         123   
  

 

 

    

 

 

 

Total Interest Expense

     1,163         1,503   
  

 

 

    

 

 

 

NET INTEREST INCOME

     6,265         6,763   

PROVISION FOR LOAN LOSSES

     —           967   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN LOSSES

     6,265         5,796   
  

 

 

    

 

 

 

NONINTEREST INCOME

     

Service charges

     586         635   

Fees, commissions and other income

     778         554   

Insurance and investment fees

     79         28   

Net realized gains on sale of investment securities

     —           48   

Life insurance investment income

     24         90   
  

 

 

    

 

 

 

Total Noninterest Income

     1,467         1,355   
  

 

 

    

 

 

 

NONINTEREST EXPENSES

     

Salaries and employee benefits

     3,334         3,389   

Occupancy and equipment expense

     1,040         1,047   

Advertising and public relations

     76         114   

Data processing and telecommunications

     447         434   

FDIC insurance premiums

     386         399   

Other real estate owned and repossessed vehicles, net

     758         1,140   

Other operating expenses

     1,238         1,315   
  

 

 

    

 

 

 

Total Noninterest Expenses

     7,279         7,838   
  

 

 

    

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     453         (687

INCOME TAX EXPENSE

     6         776   
  

 

 

    

 

 

 

NET INCOME (LOSS)

   $ 447       $ (1,463
  

 

 

    

 

 

 

Income (Loss) Per Share

     

Basic

   $ 0.02       $ (0.14
  

 

 

    

 

 

 

Fully Diluted

   $ 0.02       $ (0.14
  

 

 

    

 

 

 

Average Weighted Shares of Common Stock

     

Basic

     21,871,170         10,507,724   
  

 

 

    

 

 

 

Fully Diluted

     21,871,170         10,507,724   
  

 

 

    

 

 

 

The accompanying notes are an integral part of this statement.

 

3


Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(IN THOUSANDS)

(UNAUDITED)

 

     For the three months ended
September 30,
    For the Nine months ended
September 30,
 
     2013     2012     2013     2012  

NET INCOME (LOSS)

   $ 447      $ (1,463   $ 1,539      $ (6,536

Other comprehensive income (loss):

        

Investment Securities Activity

        

Unrealized gains (losses) arising during the period

     (935     261        (1,791     475   

Tax related to unrealized gains (losses)

     317        (89     609        (162

Reclassification of realized gains during the period

     —          (48     (99     (385

Tax related to realized gains

     —          17        33        131   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

     (618     141        (1,248     59   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME (LOSS)

   $ (171   $ (1,322   $ 291      $ (6,477
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

4


Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 21,030      $ 17,517   

Interest-bearing deposits with banks

     42,535        76,590   

Federal funds sold

     3        2   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     63,568        94,109   

Investment securities

    

Available-for-sale

     71,194        49,615   

Loans receivable

     500,974        522,363   

Allowance for loan losses

     (14,207     (16,810
  

 

 

   

 

 

 

Net Loans

     486,767        505,553   

Bank premises and equipment, net

     30,200        31,190   

Equity securities (restricted)

     2,704        2,803   

Other real estate owned

     14,109        13,869   

Accrued interest receivable

     2,221        2,374   

Life insurance investments

     12,121        11,964   

Intangible assets

     17        53   

Deferred taxes

     5,329        4,686   

Other assets

     2,587        2,799   
  

 

 

   

 

 

 

Total Assets

   $ 690,817      $ 719,015   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand deposits:

    

Noninterest bearing

   $ 100,486      $ 98,432   

Interest-bearing

     69,834        68,665   

Savings deposits

     100,893        113,280   

Time deposits

     352,967        372,473   
  

 

 

   

 

 

 

Total Deposits

     624,180        652,850   

Federal Home Loan Bank advances

     5,658        6,558   

Accrued interest payable

     2,178        1,880   

Accrued expenses and other liabilities

     2,171        1,365   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     650,683        679,149   
  

 

 

   

 

 

 

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Common stock – $2.00 par value; 50,000,000 shares authorized; 21,872,293 and 21,865,535 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

     43,745        43,731   

Common stock warrants

     2,050        2,056   

Additional paid-in-capital

     13,050        13,081   

Retained earnings (deficit)

     (17,870     (19,409

Accumulated other comprehensive income (loss)

     (841     407   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     40,134        39,866   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 690,817      $ 719,015   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

5


Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

     Shares of
Common
Stock
     Common
Stock
     Common
Stock
Warrants
    Additional
Paid-in-
Capital
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income
(Loss)
    Total
Stockholders’
Equity
 

Balance, December 31, 2011

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

Net loss

               (6,536       (6,536

Conversion of Director Notes plus accrued interest

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

Other comprehensive gain, net of tax

                 59        59   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     13,825       $ 27,649       $ 663      $ 19,119      $ (19,621   $ 308      $ 28,118   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

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

Net income

               1,539          1,539   

Exercise of Common Stock Warrants

     6         14         (6     6            14   

Stock offering costs

             (37         (37

Other comprehensive loss, net of tax

                 (1,248     (1,248
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

     21,872       $ 43,745       $ 2,050      $ 13,050      $ (17,870   $ (841   $ 40,134   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

6


Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(IN THOUSANDS)

(UNAUDITED)

 

     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ 1,539      $ (6,536

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

    

Depreciation

     1,769        1,899   

Provision for loan losses

     550        4,093   

Income (less expenses) on life insurance

     (157     (539

Gain on sale of securities available-for-sale

     (99     (385

(Gain) loss on sale of premises and equipment

     23        (5

Loss on sale of foreclosed real estate

     356        383   

Adjustment of carrying value of foreclosed real estate

     149        2,983   

Accretion of bond premiums/discounts

     692        397   

Deferred tax expense

     —          2,401   

Amortization of core deposit intangible

     36        56   

Net change in:

    

Interest receivable

     153        551   

Other assets

     212        (465

Accrued interest payable

     298        269   

Accrued expenses and other liabilities

     806        264   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     6,327        5,366   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     13,115        47,066   

Purchase of securities available-for-sale

     (36,894     (33,203

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

     12,831        17,155   

Sale of Federal Home Loan Bank stock

     309        755   

Purchase of Federal Reserve Bank stock

     (210     —     

Payments for the purchase of premises and equipment

     (1,191     (1,065

Proceeds from sales of premises and equipment

     389        22   

Proceeds from sales of other real estate owned

     4,376        7,231   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     (7,275     37,961   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Exercise of common stock warrants

     14        —     

Stock offering costs

     (37     —     

Repayments to Federal Home Loan Bank

     (900     (11,125

Net change in:

    

Demand deposits

     3,223        2,230   

Savings deposits

     (12,387     790   

Time deposits

     (19,506     (58,118
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (29,593     (66,223
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (30,541     (22,896

Cash and Cash Equivalents, Beginning of Period

     94,109        90,553   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 63,568      $ 67,657   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Period for:

    

Interest

   $ 3,327      $ 5,115   

Taxes

   $ —        $ —     

Supplemental Disclosure of Non Cash Transactions:

    

Other real estate acquired in settlement of foreclosed loans

   $ 5,366      $ 6,873   

Loans made to finance sale of foreclosed real estate

   $ 245      $ —     

Conversion of Director Notes in other borrowings to common stock

   $ —        $ 5,450   

Conversion of accrued interest payable on Director Notes to common stock

   $ —        $ 272   

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

   $ —        $ 5,722   

The accompanying notes are an integral part of this statement.

 

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Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 NATURE OF OPERATIONS:

New Peoples Bankshares, Inc. (“The Company”) is a bank holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (“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. In June 2012 the name of NPB Financial Services, Inc. was changed to NPB Insurance Services, Inc. which operates solely as an insurance agency.

 

NOTE 2 ACCOUNTING PRINCIPLES:

The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2013, and the results of operations for the three and nine month periods ended September 30, 2013 and 2012. The notes included herein should be read in conjunction with the notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three and nine month periods ended September 30, 2013 and 2012 are not necessarily indicative of the results to be expected for the full year.

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 and the determination of the deferred tax asset and valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

 

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 September 30, 2013, we believe we have not yet achieved full compliance with the Written Agreement but we have made progress in our compliance efforts under the Written Agreement and all of the written plans required to date, as discussed in the following paragraphs, have been submitted on a timely basis.

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

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

Under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain

 

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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.

 

NOTE 4 CAPITAL:

Capital Requirements and Ratios

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of September 30, 2013, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of September 30, 2013, the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Company’s and Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table as of September 30, 2013 and December 31, 2012, respectively.

 

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

(Dollars are in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2013:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 58,749         14.32     32,822         8   $ N/A         N/A   

The Bank

     56,880         13.85     32,845         8     41,056         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     51,162         12.47     16,411         4     N/A         N/A   

The Bank

     51,636         12.58     16,422         4     24,634         6

Tier 1 Capital to Average Assets:

               

The Company

     51,162         7.41     27,624         4     N/A         N/A   

The Bank

     51,636         7.47     27,641         4     34,551         5

December 31, 2012:

               

Total Capital to Risk Weighted Assets

               

The Company

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

The Bank

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

Tier 1 Capital Risk Weighted Assets:

               

The Company

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

The Bank

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

Tier 1 Capital to Average Assets:

               

The Company

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

The Bank

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

 

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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
 

September 30, 2013

           

U.S. Government Agencies

   $ 34,589       $ 262       $ 859       $ 33,992   

Taxable municipals

     —           —           —           —     

Tax-exempt municipals

     —           —           —           —     

Mortgage backed securities

     37,879         31         708         37,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 72,468       $ 293       $ 1,567       $ 71,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

U.S. Government Agencies

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

Taxable municipals

     —           —           —           —     

Tax-exempt municipals

     —           —           —           —     

Mortgage backed securities

     25,822         210         54         25,978   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

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

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2013 and December 31, 2012.

 

     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
 

September 30, 2013

                 

U.S. Government Agencies

   $ 22,278       $ 845       $ 574       $ 14       $ 22,852       $ 859   

Mtg. backed securities

     31,238         694         736         14         31,974         708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 53,516       $ 1,539       $ 1,310       $ 28       $ 54,826       $ 1,567   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

U.S. Government Agencies

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

Mtg. backed securities

     7,491         54         —           —           7,491         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, the available-for-sale portfolio included seventy one investments for which the fair market value was less than amortized cost. At December 31, 2012, the available-for-sale portfolio included ten 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 September 30, 2013, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars are in thousands)

Securities Available for Sale

   Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Due in one year or less

   $ —         $ —           —  

Due after one year through five years

     1,618         1,612         0.93

Due after five years through fifteen years

     23,729         23,468         1.68

Due after fifteen years

     47,121         46,114         1.60
  

 

 

    

 

 

    

 

 

 

Total

   $ 72,468       $ 71,194         1.61
  

 

 

    

 

 

    

 

 

 

Investment securities with a carrying value of $17.7 million and $18.4 million at September 30, 2013 and December 31, 2012, were pledged to secure public deposits, overnight payment processing and for other purposes required by law.

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading and are recorded at a cost of $2.7 million and $2.8 million as of September 30, 2013 and December 31, 2012, respectively.

 

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NOTE 6 LOANS:

Loans receivable outstanding are summarized as follows:

 

(Dollars are in thousands)    September 30, 2013      December 31, 2012  

Real estate secured:

     

Commercial

   $ 130,787       $ 149,935   

Construction and land development

     23,131         24,327   

Residential 1-4 family

     248,053         240,201   

Multifamily

     12,128         12,567   

Farmland

     30,488         33,068   
  

 

 

    

 

 

 

Total real estate loans

     444,587         460,098   

Commercial

     24,688         28,314   

Agriculture

     4,395         4,328   

Consumer installment loans

     27,155         29,445   

All other loans

     149         178   
  

 

 

    

 

 

 

Total loans

   $ 500,974       $ 522,363   
  

 

 

    

 

 

 

Loans receivable on nonaccrual status are summarized as follows:

 

(Dollars are in thousands)    September 30, 2013      December 31, 2012  

Real estate secured:

     

Commercial

   $ 17,684       $ 16,308   

Construction and land development

     1,299         2,412   

Residential 1-4 family

     4,792         3,403   

Multifamily

     —           442   

Farmland

     5,783         7,750   
  

 

 

    

 

 

 

Total real estate loans

     29,558         30,315   

Commercial

     1,375         2,762   

Agriculture

     98         450   

Consumer installment loans

     63         9   

All other loans

     —           —     
  

 

 

    

 

 

 

Total loans receivable on nonaccrual status

   $ 31,094       $ 33,536   
  

 

 

    

 

 

 

Total interest income not recognized on nonaccrual loans for nine months ended September 30, 2013 and 2012 was $375 thousand and $1.1 million, respectively.

 

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The following table presents information concerning the Company’s investment in loans considered impaired as of September 30, 2013 and December 31, 2012:

 

As of September 30, 2013

(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

   $ 17,885       $ 456      $ 16,260       $ 17,116       $ —     

Construction and land development

     2,724         31        1,050         6,035         —     

Residential 1-4 family

     4,706         115        3,128         3,390         —     

Multifamily

     734         12        327         327         —     

Farmland

     4,692         93        5,679         6,290         —     

Commercial

     818         7        314         420         —     

Agriculture

     74         5        60         60         —     

Consumer installment loans

     61         2        26         26         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

     12,077         305        10,277         10,688         1,847   

Construction and land development

     477         5        465         494         48   

Residential 1-4 family

     3,611         141        4,181         4,511         655   

Multifamily

     634         13        270         270         17   

Farmland

     3,618         91        2,264         2,402         440   

Commercial

     1,097         2        1,052         1,120         260   

Agriculture

     158         5        108         108         94   

Consumer installment loans

     22         1        11         11         4   

All other loans

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 53,388       $ 1,284      $ 45,472       $ 53,268       $ 3,365   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of December 31, 2012

(Dollars are in thousands)

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

With no related allowance recorded:

             

Real estate secured:

             

Commercial

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

Construction and land development

     4,759         118        3,759         8,618         —     

Residential 1-4 family

     7,824         227        6,308         6,567         —     

Multifamily

     1,021         44        928         998         —     

Farmland

     7,748         168        4,375         4,810         —     

Commercial

     2,499         18        1,111         1,147         —     

Agriculture

     463         7        109         109         —     

Consumer installment loans

     83         10        98         98         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

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

Construction and land development

     1,728         41        793         945         177   

Residential 1-4 family

     5,473         203        3,830         3,836         577   

Multifamily

     1,589         68        2,028         2,096         456   

Farmland

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

Commercial

     1,689         19        1,881         1,885         491   

Agriculture

     373         3        353         353         308   

Consumer installment loans

     69         3        27         27         16   

All other loans

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

 

As of September 30, 2013

(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

   $ 7,397       $ 1,014       $ 6,353       $ 14,764       $ 116,023       $ 130,787       $ —     

Construction and land development

     817         —           322         1,139         21,992         23,131         —     

Residential 1-4 family

     4,208         608         1,928         6,744         241,309         248,053         —     

Multifamily

     37         —           —           37         12,091         12,128         —     

Farmland

     281         147         4,442         4,870         25,618         30,488         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     12,740         1,769         13,045         27,554         417,033         444,587         —     

Commercial

     349         —           1,321         1,670         23,018         24,688         —     

Agriculture

     99         —           63         162         4,233         4,395         —     

Consumer installment Loans

     290         20         14         324         26,831         27,155         —     

All other loans

     9         7         —           16         133         149         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 13,487       $ 1,796       $ 14,443       $ 29,726       $ 471,248       $ 500,974       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2012

(Dollars are in thousands)

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

Real estate secured:

                    

Commercial

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

Construction and land development

     653         —           254         907         23,420         24,327         —     

Residential 1-4 family

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

Multifamily

     90         —           442         532         12,035         12,567         —     

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     117         12         360         489         3,839         4,328         —     

Consumer installment Loans

     506         66         55         627         28,818         29,445         54   

All other loans

     19         7         —           26         152         178         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

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

 

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

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

 

As of September 30, 2013

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 101,024       $ 3,974       $ 25,789       $ —         $ 130,787   

Construction and land development

     18,879         2,542         1,710         —           23,131   

Residential 1-4 family

     232,367         3,063         12,420         203         248,053   

Multifamily

     11,422         436         270         —           12,128   

Farmland

     20,413         2,248         7,827         —           30,488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     384,105         12,263         48,016         203         444,587   

Commercial

     22,576         624         1,457         31         24,688   

Agriculture

     4,211         12         172         —           4,395   

Consumer installment loans

     26,911         —           244         —           27,155   

All other loans

     149         —           —           —           149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 437,952       $ 12,899       $ 49,889       $ 234       $ 500,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2012

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

     9,765         178         2,624         —           12,567   

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     3,841         53         434         —           4,328   

Consumer installment loans

     29,159         21         261         4         29,445   

All other loans

     178         —           —           —           178   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
NOTE 7 ALLOWANCE FOR LOAN LOSSES:

The following table details activity in the allowance for loan losses by portfolio segment for the period ended September 30, 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of September 30, 2013

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 6,720       $ (1,655   $ 262       $ —         $ (384   $ 4,943   

Construction and land development

     2,166         (190     64         —           (287     1,753   

Residential 1-4 family

     3,050         (986     298         —           701        3,063   

Multifamily

     552         —          —           —           (438     114   

Farmland

     1,074         (369     68         —           205        978   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     13,562         (3,200     692         —           (203     10,851   

Commercial

     1,772         (372     41         —           (169     1,272   

Agriculture

     533         (313     51         —           195        466   

Consumer installment loans

     388         (101     49         —           (190     146   

All other loans

     4         —          —           —           (2     2   

Unallocated

     551         —          —           —           919        1,470   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 16,810       $ (3,986   $ 833       $ —         $ 550      $ 14,207   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of September 30, 2013

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

   $ 1,847       $ 3,096       $ 4,943       $ 26,537       $ 104,250       $ 130,787   

Construction and land development

     48         1,705         1,753         1,515         21,616         23,131   

Residential 1-4 family

     655         2,408         3,063         7,309         240,744         248,053   

Multifamily

     17         97         114         597         11,531         12,128   

Farmland

     440         538         978         7,943         22,545         30,488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     3,007         7,844         10,851         43,901         400,686         444,587   

Commercial

     260         1,012         1,272         1,366         23,322         24,688   

Agriculture

     94         372         466         168         4,227         4,395   

Consumer installment loans

     4         142         146         37         27,118         27,155   

All other loans

     —           2         2         —           149         149   

Unallocated

     —           1,470         1,470         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,365       $ 10,842       $ 14,207       $ 45,472       $ 455,502       $ 500,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

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

 

As of December 31, 2012

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

     148         (75     —           —           479        552   

Farmland

     951         (577     —           —           700        1,074   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

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

Commercial

     1,883         (942     86         —           745        1,772   

Agriculture

     486         (4     11         —           40        533   

Consumer installment loans

     781         (336     63         —           (120     388   

All other loans

     2         —          —           —           2        4   

Unallocated

     851         —          —           —           (300     551   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of December 31, 2012

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

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

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     308         225         533         462         3,866         4,328   

Consumer installment loans

     16         372         388         125         29,320         29,445   

All other loans

     —           4         4         —           178         178   

Unallocated

     —           551         551         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents
NOTE 8 TROUBLED DEBT RESTRUCTURINGS:

At September 30, 2013 there were $14.8 million in loans that are classified as troubled debt restructurings compared to $20.0 million at December 31, 2012. The following table presents information related to loans modified as troubled debt restructurings during the nine and three months ended September 30, 2013 and 2012.

 

     For the nine months ended
September 30, 2013
     For the nine months ended
September 30, 2012
 

Troubled Debt Restructurings

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

     1       $ 136       $ 135         7       $ 991       $ 791   

Construction and land Development

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           35         2,052         1,964   

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1         136         135         42         3,043         2,755   

Commercial

     1         51         11         —           —           —     

Agriculture

     —           —           —           —           —           —     

Consumer installment loans

     1         14         13         3         25         19   

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 201       $ 159         45       $ 3,068       $ 2,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the three months ended
September 30, 2013
     For the three months ended
September 30, 2012
 

Troubled Debt Restructurings

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

     1       $ 136       $ 135         —         $ —         $ —     

Construction and land Development

     —           —           —           —           —           —     

Residential 1-4 family

     —           —           —           —           —           —     

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1         136         135         —           —           —     

Commercial

     —           —           —           —           —           —     

Agriculture

     —           —           —           —           —           —     

Consumer installment loans

     —           —           —           —           —           —     

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 136       $ 135         —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2013, the Company modified 3 loans that were considered to be troubled debt restructurings. We modified the terms for 1 loan and the interest rate was lowered on 1 loan. On 1 loan we modified the terms and lowered the interest rate. During the nine months ended September 30, 2012, the Company modified 45 loans that were considered to be troubled debt restructurings. We modified the terms for 10 of these loans and the interest rate was lowered for 33 loans. On 2 loans we modified the terms and lowered the interest rate.

 

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Table of Contents

The following table presents information related to loans modified as a troubled debt restructurings that defaulted during the nine and three months ended September 30, 2013 and 2012, and within twelve months of their modification date. A troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

Troubled Debt Restructurings That Subsequently Defaulted During the Period

(Dollars are in thousands)

   For the nine months ended
September 30, 2013
     For the nine months ended
September 30, 2012
 
   # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 

Real estate secured:

           

Commercial

     —         $ —           4       $ 1,859   

Construction and land development

     —           —           —           —     

Residential 1-4 family

     —           —           2         633   

Multifamily

     —           —           1         163   

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —           —           7         2,655   

Commercial

     —           —           —           —     

Agriculture

     —           —           1         300   

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           8       $ 2,955   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings That Subsequently Defaulted During the Period

(Dollars are in thousands)

   For the three months ended
September 30, 2013
     For the three months ended
September 30, 2012
 
   # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 

Real estate secured:

           

Commercial

     —         $ —           —         $ —     

Construction and land development

     —           —           —           —     

Residential 1-4 family

     —           —           1         522   

Multifamily

     —           —           1         163   

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     —           —           2         685   

Commercial

     —           —           —           —     

Agriculture

     —           —           —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           2       $ 685   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents
NOTE 9 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 reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options and common stock warrants are determined by the Treasury method. For the three and nine months ended September 30, 2013 and 2012, 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 three months ended
September 30,
    For the nine months ended
September 30,
 
     2013      2012     2013      2012  

Net income (loss)

   $ 447       $ (1,463   $ 1,539       $ (6,536

Weighted average shares outstanding

     21,871,170         10,507,724        21,870,240         10,177,237   

Dilutive shares for stock options and warrants

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average dilutive shares outstanding

     21,871,170         10,507,724        21,870,240         10,177,237   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic income (loss) per share

   $ 0.02       $ (0.14   $ 0.07       $ (0.64

Diluted income (loss) per share

   $ 0.02       $ (0.14   $ 0.07       $ (0.64

 

NOTE 10 RELATED PARTY TRANSACTIONS:

During 2010, the branch location in Grundy, Virginia which was part of a condominium in which the Bank and Director Michael McGlothlin owned the only units was condemned by the Virginia Department of Transportation. The value of the Bank’s interest in its condemned condominium units was $892 thousand and the value of Director McGlothlin’s interest in his condemned condominium unit was $455 thousand as appraised by the Virginia Department of Transportation. Subsequently, a new building was constructed on adjacent property with the condemnation proceeds. The Bank’s branch in the new building was opened on January 31, 2011 and a portion of the building comparable to his condemned unit was occupied by Director McGlothlin at this time as well. Throughout 2011 additional work was conducted by the contractor. Minor projects remained at the end of 2011 and were completed during 2012. The new building is subject to a newly formed condominium agreement, the terms of which are substantially similar to the terms of the previous condominium arrangement. Final settlement of the transaction, including the recording of the condominium agreement, occurred in June 2013 on terms the Bank believes are consistent with an arm’s length market transaction.

 

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Table of Contents
NOTE 11 FAIR VALUES:

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

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

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

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

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

Investment Securities Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $71.2 million and $49.6 million at September 30, 2013 and December 31, 2012, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. From time to time a loan is considered impaired and an allowance for loan losses is established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the impaired loan as nonrecurring Level 3. The aggregate carrying amount of impaired loans carried at fair value were $42.1 million and $59.3 million at September 30, 2013 and December 31, 2012, respectively.

Foreclosed Assets - Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral if further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $14.1 million and $13.9 million at September 30, 2013 and December 31, 2012, respectively.

 

20


Table of Contents

Assets and liabilities measured at fair value are as follows as of September 30, 2013 (for purpose of this table the impaired loans are shown net of the related allowance):

 

(Dollars are in thousands)    Quoted market
price in active
markets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 33,992       $ —     

Mortgage backed securities

     —           37,202         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           14,109   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           24,690   

Construction and land development

     —           —           1,467   

Residential 1-4 family

     —           —           6,654   

Multifamily

     —           —           580   

Farmland

     —           —           7,503   

Commercial

     —           —           1,106   

Agriculture

     —           —           74   

Consumer installment loans

     —           —           33   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 71,194       $ 56,216   
  

 

 

    

 

 

    

 

 

 

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

 

(Dollars are in thousands)    Quoted market
price in active
markets
(Level 1)
     Significant other
observable inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 23,637       $ —     

Mortgage backed securities

     —           25,978         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           13,869   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           30,688   

Construction and land development

     —           —           4,375   

Residential 1-4 family

     —           —           9,561   

Multifamily

     —           —           2,500   

Farmland

     —           —           9,442   

Commercial

     —           —           2,501   

Agriculture

     —           —           154   

Consumer installment loans

     —           —           109   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 49,615       $ 73,199   
  

 

 

    

 

 

    

 

 

 

 

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For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

   Fair Value at
September 30,
2013
     Valuation
Technique
   Significant
Unobservable Inputs
   Significant
Unobservable
Input Value

Impaired Loans

   $ 42,107       Appraised
Value/Discounted
Cash

Flows/Market

Value of Note

   Appraisals and/or
sales of comparable
properties/Independent

quotes

   n/a

Other Real Estate Owned

   $ 14,109       Appraised
Value/Comparable
Sales/Other
Estimates from
Independent
Sources
   Appraisal and/or sales

of comparable
properties/Independent

quotes/bids

   n/a

Fair Value of Financial Instruments

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

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

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2013 and December 31, 2012. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments during the months of September 2013 and December 2012.

 

                   Fair Value Measurements  

(Dollars are in thousands)

   Carrying
Amount
     Fair
Value
     Quoted
market price
in active
markets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

September 30, 2013

              

Financial Instruments – Assets

              

Net Loans

   $ 486,767       $ 489,743       $ —         $ 447,636       $ 42,107   

Financial Instruments – Liabilities

              

Time Deposits

     352,967         352,092         —           352,092         —     

FHLB Advances

     5,658         5,658         —           5,658         —     

December 31, 2012

              

Financial Instruments – Assets

              

Net Loans

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

Financial Instruments – Liabilities

              

Time Deposits

     372,473         375,784         —           375,784         —     

FHLB Advances

     6,558         6,558         —           6,558         —     

 

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NOTE 12 RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

The Comprehensive Income topic of the Accounting Standards Codification (“ASC”) was amended in June 2011. The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company January 1, 2012 and have been applied retrospectively.

In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the Financial Accounting Standards Board (“FASB”) redeliberated the presentation requirements for the reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments will be effective for the Company on a prospective basis for reporting periods beginning January 1, 2013. These amendments did not have a material effect on the Company’s financial statements.

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

 

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

Caution About Forward Looking Statements

We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, business 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.

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

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.

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.

 

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Written Agreement Progress Report

At September 30, 2013 we believe we have not yet achieved full compliance with the Agreement but we have made progress in our compliance efforts under the Agreement. We are aggressively working to comply with the Agreement and have timely submitted each required plan by its respective deadline. We have hired an independent consultant to assist us in these efforts and the following actions have taken place:

 

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

 

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

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

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

 

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

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

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

In accordance with our capital plan, we began a common stock offering in July 2012 to existing shareholders followed by an offering to the public during the third and fourth quarters of 2012. The offering was closed on December 20, 2012 and proceeds of $12,061,257 were received on December 28, 2012. Upon receipt of the proceeds we injected $7.0 million of capital into the Bank. The remaining net proceeds are held at the Company and will be used for payment of operating expenses and, when permitted by regulatory authorities, the payment of deferred trust preferred interest. The remaining additional cash may be used for future capital injections, if needed; thus, providing a source of strength at the holding company level for the Bank. In addition, the conversion of the director notes to common stock and the stock offering included common stock warrants that may be exercised in the next five years and potentially provide additional capital if, and when, they are exercised. A total of 2,364,142 common stock warrants were outstanding as of September 30, 2013 with an exercise price of $1.75. Assuming all of these warrants are exercised before expiration, then an additional $4.1 million in capital would be provided by their exercise.

 

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

 

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

 

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

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

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

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

 

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

 

  8. To support the focus on problem credit management the Bank further developed, in March, 2011, a Special Assets department which reports to the Chief Credit Officer. Presently, the department has one workout specialist/Vice President, one Vice President managing other real estate owned properties, an analyst, and two support personnel. Substantially all the credits in the Bank which are risk rated Special Mention or worse are assigned to this department once all efforts to return the credit to a satisfactory rating have been exhausted. 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 on all problem credits in excess of $1.0 million. A quarterly management watch list committee has been established to actively manage and monitor these credits.

 

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

 

  10. We have significantly increased our asset based liquidity sources throughout 2010, 2011, 2012 and 2013 to meet financial obligations. A new liquidity risk management policy has been adopted and a revised contingency funding plan has been created. We have lost all of our federal funds lines of credit, but we have added an internet certificate of deposit funding source to increase contingent funding sources. We believe that we have adequate liquidity in normal and stressed situations. We are further developing an investment portfolio, as well. The investment portfolio has grown to $71.2 million at September 30, 2013 from $4.7 million at December 31, 2010.

 

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

 

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

 

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Overview

The third quarter of 2013 shows a continued positive trend in earnings, capital, and improved asset quality.

The Company had net income for the quarter ended September 30, 2013 of $447 thousand as compared to a net loss of $1.5 million for the quarter ended September 30, 2012. Year-to-date September 30, 2013, the Company had net income of $1.5 million as compared to a net loss of $6.5 million for the same period in 2012. Basic net income per share was $0.02 for the quarter ended September 30, 2013 as compared to basic net loss per share of $0.14 for the quarter ended September 30, 2012. Basic net income per share was $0.07 for the nine months ended September 30, 2013 as compared to a net loss per share of $0.64 for the nine months ended September 30, 2012. The net income for the nine months ended September 30, 2013 is primarily the result of the decreases in the other real estate owned expenses, a reduction of loan loss provision, cost savings in operational expenses through various initiatives taken in prior periods, and no income tax expense when compared to the nine months ended September 30, 2012.

In the third quarter of 2013, our net interest margin was 4.01%, as compared to 4.20% for the same period in 2012 due to the decrease in net interest income of $498 thousand during the third quarter of 2013 as compared to the same period in 2012 primarily related to a decreased loan portfolio, continued high level of nonperforming assets, and new loans being booked at lower interest rates. In addition, our cost of funds has decreased; however, this decrease has been at a slower pace than the decrease in interest income.

Total deposits decreased $28.7 million from $652.9 million at December 31, 2012 to $624.2 million at September 30, 2013 as we have experienced shrinkage in savings and time deposits due to the interest rate environment which is helping us lower our cost of funds and improve our capital ratios through increased earnings and decreased assets.

Total assets decreased to $690.8 million, or 3.92%, from $719.0 million at December 31, 2012. We have intentionally reduced our asset size in an attempt to improve our capital position and manage our net interest margin by reducing higher cost funding. We foresee total assets to maintain around current levels in the near future as we manage to maintain the level of earning assets and continue to improve net income.

At September 30, 2013, the Company remains well-capitalized. The Tier 1 leverage ratio was 7.41% at September 30, 2013, compared to 7.05% at December 31, 2012. The Tier 1 risk based ratio was 12.47% at September 30, 2013, compared to 11.56% at December 31, 2012. The Total risked based capital ratio was 14.32% at September 30, 2013, compared to 13.51% at December 31, 2012.

At September 30, 2013, the Bank also remains well capitalized under the regulatory framework for prompt corrective action. The following ratios existed at September 30, 2013 for the Bank: Tier 1 leverage ratio of 7.47%, Tier 1 risk based capital ratio of 12.58%, and Total risk based capital ratio of 13.85%. The ratios were as follows at December 31, 2012: Tier 1 leverage ratio of 7.08%, Tier 1 risk based capital ratio of 11.60%, and Total risk based capital ratio of 12.88%.

Total loans decreased $21.4 million, to $501.0 million at September 30, 2013 from $522.4 million at year end 2012 primarily in adversely classified loans. Loans rated substandard decreased $12.2 million, or 19.73%, to $49.9 million at September 30, 2013 from $62.1 million at December 31, 2012. The remaining loan portfolio remained relatively unchanged. The reduction in the adversely classified loans is the result of charge offs of $4.0 million for the first nine months of 2013, foreclosures, and the resolution of problem loans. The remaining portfolio maintained levels as we continue to serve our customers by renewing existing credits and pursuing new loans to qualified borrowers. We anticipate some further decreases in the loan portfolio in the near future as we decrease nonperforming loans. However, lending personnel are focused on developing new and existing lending relationships which should continue to slow the pace of the reduction and maintain current levels in total loans subject, of course, to the impact of the underperforming economy and heightened competition in the banking industry.

Although asset quality is improving, nonperforming assets are higher than we desire as a result of the prolonged deterioration of the residential and commercial real estate markets, as well as the recessionary period. The ratio of nonperforming assets to total assets lowered to 6.54% at September 30, 2013 as compared to 6.67% at December 31, 2012. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, decreased to $45.2 million at September 30, 2013 from $48.0 million at December 31, 2012, a reduction of $2.8 million, or 5.74%. The majority of these assets are commercial real estate, residential mortgages, and farmland real estate secured loans and other real estate owned properties. We are undertaking extensive efforts to work out these credits and liquidate foreclosed properties. This will take some time, but overall we believe we are making progress. In the first nine months of 2013, net charge offs were $3.2 million as compared to $4.9 million in the same period of 2012. Total net charge offs for the third quarter totaled $37 thousand, or 1.17% of year-to-date charge offs with a majority of the charge offs year-to-date occurring in the first quarter of 2013. Net charge offs for the year were related to real estate construction loans and commercial loans with collateral values that are dependent upon current market and economic conditions when these are ascertainable.

 

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Delinquencies also showed improvement in the third quarter of 2013 as total past dues decreased to $29.7 million at September 30, 2013 from $39.5 million at December 31, 2012, an improvement of $9.8 million, or 24.65% decrease.

The continued improvements in asset quality during the third quarter of 2013 warranted no provisions for loan losses as compared to $967 thousand in loan loss provisions in the same period for 2012. At September 30, 2013, our allowance for loan losses totaled $14.2 million, or 2.84% of total loans, as compared to $16.8 million, or 3.22% of total loans as of December 31, 2012. At September 30, 2012 our allowance for loan losses totaled $17.6 million, or 3.26% of total loans. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized. We continue to modify the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures.

Critical Accounting Policies

For discussion of our significant accounting policies see our Annual Report on Form 10-K for the year ended December 31, 2012. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and valuation allowance.

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on “Provision for Loan Losses” below.

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

Balance Sheet Changes

At September 30, 2013, total assets were $690.8 million, a decrease of $28.2 million, or 3.92%, over December 31, 2012. Total deposits decreased $28.7 million, or 4.39%, for the first nine months of 2013 to $624.2 million from $652.9 million at December 31, 2012. Total loans decreased $21.4 million, or 4.09%, to $501.0 million at September 30, 2013 from $522.4 million at December 31, 2012.

Core deposits increased as noninterest bearing deposits increased 2.09%, or $2.1 million, from $98.4 million at December 31, 2012 to $100.5 million at September 30, 2013. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities. We experienced an increase of $1.1 million in interest bearing demand deposits during the first nine months of 2013. We continue our efforts to increase core deposit levels

We experienced a decrease of $12.4 million in savings deposits and a decrease in time deposits of $19.5 million during the first nine months of 2013. This is the result of decreased interest rates offered in this very low interest rate environment and some short term funds have withdrawn to seek other investment opportunities. We expect to continue to lose higher cost and rate sensitive deposits in the near future, but at a decreased pace than in the past. However, we monitor deposits to ensure that we maintain adequate liquidity levels. We believe, despite the deposit decrease, we have adequate liquidity.

Total loans decreased to $501.0 million at September 30, 2013 from $522.4 million at year end 2012 primarily by reducing adversely classified loans as the result of charge offs of $4.0 million for the first nine months of 2013, foreclosures and effectively working with our borrowers. We plan to maintain the level of the loan portfolio as we reduce certain risks to various industry sectors that have posed higher risks in recent times and resolve nonperforming loans, while we increase lower risk loan production that offsets the reductions as mentioned. We remain committed to serving our customers. Our lending personnel continue to receive training to meet the needs of our customers and to develop new business with qualified borrowers that will ensure a stronger loan portfolio in the future.

 

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Other real estate owned increased $240 thousand to $14.1 million at September 30, 2013 from $13.9 million at December 31, 2012. We anticipate total other real estate owned to increase in the near future as we foreclose on real estate collateralized loans. All properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. During the first nine months of 2013, we acquired $5.4 million in other real estate owned as a result of settlement of foreclosed loans, which was offset by sales of $4.4 million of our properties with losses of $356 thousand realized as a result of the sales. We also recorded writedowns on other real estate owned properties in the amount of $149 thousand for the first nine months of 2013. This was due to the receipt of updated valuations on the other real estate owned properties, which showed a lower fair value than our carrying amount of the properties, and accordingly we recorded a writedown on the properties. 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.

Net Interest Income and Net Interest Margin

Net interest income decreased $498 thousand, or 7.36%, to $6.3 million for the third quarter of 2013 from $6.8 million for the same period in 2012. This is the result of decreased interest income from new and renewed loans recorded at lower interest rates and a higher level of nonaccrual loans of $31.1 million at September 30, 2013 which negatively affects the net interest margin as these loans are nonearning assets. As a result our net interest margin decreased to 4.01% in the third quarter of 2013 as compared to 4.20% for the same period in 2012. We are trying to preserve the net interest margin, but we may experience some decrease in the net interest margin as new and renewed loans are sometimes priced at lower market interest rates and as opportunities decrease to lower our cost of funds since repricing of deposits will be close to existing interest rates in the future. Because of the tightening of our underwriting, loan pricing may be lower than historically; however, typically more conservative underwriting reduces the likelihood of future loan losses. Loan losses negatively impact earnings through various related expenses, for example, loan loss provisions, collection expenses, etc.

With regard to recognition of interest income on impaired loans, interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, then the interest income on the loan is computed using the effective interest method. If there is serious doubt about the collectability of an impaired loan, it is the Bank’s policy to stop accruing interest on a loan and classify that loan as nonaccrual 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 placed on nonaccrual or charged off are 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. In addition, funds generated from a shrinking loan portfolio are reinvested at lower interest rates in both overnight deposits for liquidity purposes and in investment securities. If nonaccruing loans increase, it may reduce our net interest margin further. We continue to manage our yields on assets and our costs of funds to attempt to improve the net interest margin.

As mentioned earlier, our loan portfolio has decreased and as a result the interest income generated by these higher earning assets has been redeployed into investment securities, a lower yielding asset. The overall effect is a decrease in the interest income of the Bank.

Although our cost of funds has decreased due to deposits repricing at lower interest rates, the rate of this decrease in interest costs is not consistent with the rate of decrease in interest income; consequently, this is causing net interest income to decrease overall.

Noninterest Income

Noninterest income increased $112 thousand, or 8.27%, to $1.5 million in the third quarter of 2013 from $1.4 million for the same period in 2012. During the third quarter of 2013 we had no realized gains on the sale of investment securities. We expect noninterest income to remain flat throughout 2013 as a result of regulatory changes; however, we continue to seek opportunities to improve noninterest income. As a part of these efforts, NPB Insurance Services, Inc., the Bank’s subsidiary, a full-service insurance agency, began operations in the first quarter of 2013, dealing in personal and group life, property and casualty, health, and disability products.

 

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Noninterest Expense

Noninterest expense decreased $559 thousand, or 7.13%, to $7.3 million for the third quarter 2013 as compared to $7.8 million for the third quarter of 2012. The following are explanations of the decrease in non-interest expenses for 2013 as compared to 2012.

Salaries and benefits decreased $55 thousand in the quarter-to-quarter comparison from $3.4 million at September 30, 2012 to $3.3 million for the same period in 2013. Total full time equivalent employees have decreased to 272 at September 30, 2013 from 289 at September 30, 2012, a reduction of 17, or 5.88%. We are continuing to focus on managing salary and benefits expenses.

Other real estate owned and repossessed asset expenses decreased $382 thousand or 33.51%, to $758 thousand for the third quarter 2013 as compared to $1.1 million for the same period in 2012. Writedowns on other real estate owned decreased $486 thousand from $667 thousand during the third quarter of 2012 to $181 thousand during the third of 2013. In the third quarter of 2013 we had a net loss on the sale of other real estate owned property of $383 thousand compared to a net loss of $182 thousand during the same period in 2012. We believe that other real estate owned write-downs may continue to reduce from the past as these have been primarily related to construction and development type properties that have been significantly impacted due to recent market valuation trends and foreclosed properties are held at current market values in a stabilized market.

Our efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 94.14% for the third quarter of 2013 as compared to 96.55% for the same period in 2012. Included in this calculation are the other real estate owned write-downs which significantly and negatively impact the ratio. During the third quarter of 2013, we engaged an outside consultant to evaluate our operational efficiencies. Based on the recommendations we plan to implement, we anticipate the efficiency ratio to improve in the future as we realize cost savings from operational improvements.

Provision for Loan Losses

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

The allowance for loan losses decreased to $14.2 million at September 30, 2013 as compared to $16.8 million at December 31, 2012. The allowance for loan losses at September 30, 2013 was approximately 2.84% of total loans as compared to 3.22% at December 31, 2012 and 3.26% at September 30, 2012. Net loans charged off for the first nine months of 2013 were $3.2 million, or 0.82% of average loans, and $4.9 million, or 1.15% of average loans, for the first nine months of 2012. No provision for loan losses was made during the third quarter of 2013 as compared with $967 thousand in the same period for 2012. Year-to-date provisions for loan losses are $550 thousand and $4.1 million for the nine months ended September 30, 2013 and 2012, respectively, a reduction of $3.6 million.

We have experienced a decrease in loan delinquencies and nonaccrual loans during the first nine months of 2013. Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present higher risks of default and loan losses. At September 30, 2013, there were 130 loans in non-accrual status totaling $31.1 million, or 6.21% of total loans. At December 31, 2012, there were 112 loans in non-accrual status totaling $33.5 million, or 6.42% of total loans. The amounts of interest that would have been recognized on these loans were $375 thousand and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively. There were no loans past due 90 days or greater and still accruing interest at September 30, 2013 compared to 15 loans past due 90 days or greater and still accruing interest totaling $511 thousand, or 0.10% of total loans at year end 2012. There were $14.8 million in loans classified as troubled debt restructurings as of September 30, 2013 as compared to $20.0 million in loans classified as troubled debt restructurings as of December 31, 2012. Of the loans classified as troubled debt restructurings at September 30, 2013, $7.7 million were in non-accrual status, compared to $5.4 million at December 31, 2012. We do not have any commitments to lend additional funds to non-performing debtors.

Certain risks exist in the Bank’s loan portfolio. A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize loss exposures in case of default. With the exception of real estate development type properties which have experienced more deterioration in market values, the local residential and commercial real estate market values have shown some deterioration but remain relatively stable. It is uncertain as to when or if local real estate values will be more significantly impacted. We do not believe that there will be a severely negative effect in our market area, but because of the uncertainty we deem it prudent to assign more of the allowance to these types of loans. Our market area is somewhat diverse, but certain areas are more reliant upon

 

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agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible as the coal mining and natural gas industry have been negatively affected in the past year due to layoffs and environmental legislation. We do not foresee a major impact upon the Bank unless a severe downturn occurs which we believe is not highly likely. We are monitoring these industries. We consider these factors to be the primary higher risk characteristics of the loan portfolio.

Commercial loans are initially risk rated by the originating loan officer. If deteriorations in the financial condition of the borrower and the capacity to repay the debt occur, along with other factors, the loan may be downgraded. This is to be determined by the loan officer. Guidance for the evaluation is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are exceptional, very good, standard, acceptable, transitory risk, other assets especially mentioned, substandard, doubtful and loss. For the year 2012, we engaged a third party loan review firm to conduct semiannual loan reviews and have engaged them to perform this function in 2013 on a semiannual basis. Our most recent loan review was conducted in June 2013. Upon these reviews, loans risk ratings may change from the rating assigned by the respective lender. We have experienced fewer rating changes in more recent reviews indicating better risk identification for the loan portfolio in light of the experience from the severe recession.

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

All loans classified as substandard, doubtful and loss are individually reviewed for impairment. In determining impairment, collateral for loans classified as substandard, doubtful and loss is reviewed to determine if the collateral is sufficient for each of these credits, generally through the review of the appraisal. If the appraisal is current, less than twelve months old, and has been reviewed, then if no negative information regarding the appraised value is obtained, the value is accepted, and impairment, if required is made. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable. If this review determines that the appraisal is not reasonable, then a new appraisal is ordered, in most cases. Impaired loans decreased to $45.5 million with $18.6 million requiring a valuation allowance of $3.4 million at September 30, 2013 as compared to $65.2 million with $28.1 million requiring a valuation allowance of $5.9 million at December 31, 2012. Of the $45.5 million recorded as impaired loans, $27.0 million were nonperforming loans, which includes nonaccrual loans and past due 90 days or more. Management is aggressively working to reduce the impaired credits at minimal loss.

In determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450), we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables topic of the Accounting Standards Codification (ASC 310). If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made for the amount of the potential loss in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Deferred Tax Asset and Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a deferred tax asset of $5.3 million existed at September 30, 2013 compared to $4.7 million at December 31, 2012. During the first nine months of 2013 we reversed $428 thousand of our deferred tax asset valuation allowance as compared to a $4.1 million valuation allowance which was recognized in the first nine months of 2012. The total valuation allowance was $6.4 million at September 30, 2013 compared to $6.8 million at December 31, 2012. Management reviewed the September 30, 2013 deferred tax calculation to determine the need for a valuation allowance. Based on the trend of reduced levels of earning assets and net interest income, we modified the projections of taxable income over the next three years and determined that no additional deferred tax asset valuation allowance was required. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential increased investment income, and the effects of off-setting deferred tax liabilities, it is more likely than not that all the deferred tax assets, net of the $6.4 million allowance, would be realizable.

 

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Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $5.2 million. Management expects to utilize all of these carryforwards prior to expiration. Direct charge-offs contributed to a reduction of the tax asset and are permitted as tax deductions. In addition, writedowns on other real estate owned property are expensed for book purposes but are not deductible for tax purposes until disposition of the property. Goodwill expense also was realized for book purposes in 2011 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. At September 30, 2013, year-to-date taxable income produced an income tax expense of $520 thousand. This amount was applied against the net operating loss carryforward resulting in no income tax expense year-to-date in 2013. Taxable income in the future and during the net operating loss carryforward period resulting in income tax expenses is expected to be applied to the net operating loss carryforward until the carryforward is depleted. When, and if, taxable income trends continue and asset quality improves, the entire valuation allowance previously recorded and remaining 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

Total capital at the end of the second quarter of 2013 was $40.1 million as compared to $39.9 million at the end of December 31, 2012. The Bank and the Company were both well capitalized as of September 30, 2013, as defined by the regulatory capital guidelines. The Company’s capital as a percentage of total assets was 5.81% at September 30, 2013 compared to 5.54% at December 31, 2012. Book value per common share was $1.83 at September 30, 2013 compared to $1.82 at December 31, 2012.

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

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

Liquidity

We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments were $117.1 million at September 30, 2013 down from $125.3 million at December 31, 2012. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2013.

At September 30, 2013, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $53.5 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 $49.6 million at December 31, 2012 to $71.2 million at September 30, 2013. Our strategy is to manage the portfolio with future purchases that reduce price risk in a rising interest rate environment and shorten the duration of these securities to be able to invest in higher yielding loans and investments when interest rates do rise again. At September 30, 2013, the investment portfolio decreased in fair market value as a result of an increase in longer term interest rates. This decrease in fair market value resulted in a net unrealized loss of $1.3 million, a $1.9 million decrease from the net unrealized gain at December 31, 2012 which was $616 thousand. We believe this may be a continued trend when interest rates increase; therefore, our strategy is to reduce the overall portfolio interest rate risk as interest rates may rise in the future.

Our loan to deposit ratio increased to 80.26% at September 30, 2013 from 80.01% at year end 2012. We anticipate this ratio to remain below 85% in the future. We can 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.

 

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Available third party sources of liquidity remain intact at September 30, 2013 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 September 30, 2013, we had borrowings from the Federal Home Loan Bank totaling $5.7 million as compared to $6.6 million at December 31, 2012. None are overnight and subject to daily interest rate changes. The borrowings have a maturity date in the year 2018, but reduce in principal amounts monthly. The decrease of $900 thousand was due to regularly scheduled principal payments. We also used our line of credit with the Federal Home Loan Bank to issue a letter of credit for $3.0 million in 2010 and $7.0 million in 2013 to the Treasury Board of Virginia for collateral on public funds. An additional $76.3 million was available on September 30, 2013 on the $91.9 million line of credit which is secured by a blanket lien on our residential real estate loans. Our line of credit increased during the second quarter of 2013 as a result of an improved rating assessed by the Federal Home Loan Bank due to our improving performance.

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, investment cashflows, 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 have $4.4 million in cash as of September 30, 2013. These funds will be used to pay operating expenses, trust preferred interest payments (upon regulatory approval), and provide additional capital injections to the Bank, if needed. As of now, all interest payments to the trust preferred securities is deferred. In the event, trust preferred interest payments are no longer deferred, then the Company has the cash to meet this obligation without any reliance on the Bank. The current deferred liability totals $1.8 million and is anticipated to be paid in the first quarter of 2015 subject to regulatory approval.

As a result of the conversion of director notes and the common stock offering during 2012, a total of 2,370,900 common stock warrants were issued. The warrants are immediately exercisable over the next five years at a price of $1.75 per share. During the first nine months of 2013, 6,758 warrants were exercised, which reduced the number of warrants outstanding at September 30, 2013 to 2,364,142. When and if, these warrants are exercised, additional funds may be received by the Company, which provides potentially up to $4.1 million in additional liquidity and capital at the Company level. Additional contingent funding sources will be explored as available.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the quarter ended September 30, 2013 to the off-balance sheet items and the contractual obligations disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2012.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

 

Item 4. Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our “CEO”) and our Executive Vice President and Chief Financial Officer (our

 

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“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2013 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Part II Other Information

 

Item 1. Legal Proceedings

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

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

 

Item 1A. Risk Factors

Not Applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

 

Item 3. Defaults Upon Senior Securities

Not Applicable

 

Item 4. Mine Safety Disclosures

Not Applicable

 

Item 5. Other Information

Not Applicable

 

Item 6. Exhibits

See Index of Exhibits.

 

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SIGNATURES

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

 

  NEW PEOPLES BANKSHARES, INC.
  (Registrant)
By:  

/s/ JONATHAN H. MULLINS

  Jonathan H. Mullins
  President and Chief Executive Officer
Date:   November 13, 2013
By:  

/s/ C. TODD ASBURY

  C. Todd Asbury
  Executive Vice President and Chief Financial Officer
Date:   November 13, 2013

 

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Index of Exhibits

 

No.

  

Description

    2.1

   Agreement and Plan of Share Exchange dated August 15, 2011 (incorporated by reference to Exhibit 2 to Form 8-K filed December 17, 2011).

    3.1

   Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).

    3.2

   Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on April 15, 2004).

    4.1

   Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

    4.2

   Form of Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.2 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

    4.3

   Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

  10.1*

   New Peoples Bank, Inc. 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001).

  10.2*

   Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K filed November 30, 2004).

  10.3*

   Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K filed November 30, 2004).

  10.4*

   Salary Continuation Agreement dated December 18, 2002 between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

  10.5*

   First Amendment dated June 30, 2003 to Salary Continuation Agreement between New Peoples Bank, Inc. and Frank Sexton, Jr. (incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-K for the fiscal year ended December 31, 2004).

  10.6*

   Letter Agreement, dated as of June 29, 2009, between the Company and Kenneth D. Hart (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2009).

  10.7

   Written Agreement, effective August 4, 2010, by and among New Peoples Bankshares, Inc., New Peoples Bank, Inc., the Federal Reserve Bank of Richmond and the State Corporation Commission Bureau of Financial Institutions (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 6, 2010).

  10.8

   Engagement Letters of Scott & Stringfellow, LLC (incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).

  10.9

   Convertible Note Payable, B. Scott White, dated June 27, 2012 (incorporated by reference to Exhibit 10.1 to Form 8-K filed June 29, 2012).

  10.10

   Convertible Note Payable, Harold Lynn Keene, dated June 27, 2012 (incorporated by reference to Exhibit 10.2 to Form 8-K filed June 29, 2012).

  31.1

   Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

  31.2

   Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

  32

   Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

101

   The following materials for the Company’s 10-Q Report for the quarterly period ended September 30, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

 

* Denotes management contract.

 

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