Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

 

¨ 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   þ     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   þ     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   þ

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

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 August 13, 2012

Common Stock, $2.00 par value

   10,010,178

 

 

 


Table of Contents

NEW PEOPLES BANKSHARES, INC.

INDEX

 

         Page  

PART I

  FINANCIAL INFORMATION      2   

Item 1.

  Financial Statements      2   
  Consolidated Statements of Operations – Six Months Ended June 30, 2012 and 2011 (Unaudited)      2   
  Consolidated Statements of Operations – Three Months Ended June 30, 2012 and 2011 (Unaudited)      3   
  Consolidated Statements of Comprehensive Income (Loss) – Six Months Ended June 30, 2012 and 2011 (Unaudited)      4   
  Consolidated Balance Sheets – June 30, 2012 (Unaudited) and December 31, 2011      5   
  Consolidated Statements of Changes in Stockholders’ Equity Six Months Ended June 30, 2012 and 2011 (Unaudited)      6   
  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011 (Unaudited)      7   
  Notes to Consolidated Financial Statements      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      34   

Item 4.

  Controls and Procedures      34   

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      35   

Item 6.

  Exhibits      35   

SIGNATURES

     36   


Table of Contents
Part I Financial Information

 

Item 1 Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2012     2011  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 16,795      $ 21,402   

Federal funds sold

     1        9   

Interest-earning deposits with banks

     95        80   

Investments

     441        84   

Dividends on equity securities (restricted)

     55        50   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     17,387        21,625   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     54        89   

Savings

     120        324   

Time deposits below $100,000

     1,657        2,630   

Time deposits above $100,000

     1,112        1,574   

FHLB Advances

     331        444   

Other borrowings

     88        105   

Trust Preferred Securities

     247        200   
  

 

 

   

 

 

 

Total Interest Expense

     3,609        5,366   
  

 

 

   

 

 

 

NET INTEREST INCOME

     13,778        16,259   

PROVISION FOR LOAN LOSSES

     3,126        3,457   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     10,652        12,802   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     1,199        1,159   

Fees, commissions and other income

     1,188        1,019   

Insurance and investment fees

     232        191   

Net realized gains on sale of investment securities

     337        —     

Life insurance investment income

     145        176   
  

 

 

   

 

 

 

Total Noninterest Income

     3,101        2,545   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     7,107        7,859   

Occupancy and equipment expense

     2,184        2,144   

Advertising and public relations

     211        183   

Data processing and telecommunications

     889        798   

FDIC insurance premiums

     845        1,096   

Other real estate owned and repossessed vehicles, net

     3,247        2,490   

Other operating expenses

     2,756        2,660   
  

 

 

   

 

 

 

Total Noninterest Expenses

     17,239        17,230   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (3,486     (1,883

INCOME TAX EXPENSE (BENEFIT)

     1,587        (757
  

 

 

   

 

 

 

NET LOSS

   $ (5,073   $ (1,126
  

 

 

   

 

 

 

Loss Per Share

    

Basic

   $ (0.51   $ (0.11
  

 

 

   

 

 

 

Fully Diluted

   $ (0.51   $ (0.11
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     10,010,178        10,010,178   
  

 

 

   

 

 

 

Fully Diluted

     10,010,178        10,010,178   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2012     2011  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 8,047      $ 10,514   

Federal funds sold

     1        —     

Interest-earning deposits with banks

     48        54   

Investments

     240        45   

Dividends on equity securities (restricted)

     29        28   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     8,365        10,641   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     28        44   

Savings

     58        138   

Time deposits below $100,000

     782        1,242   

Time deposits above $100,000

     525        769   

FHLB Advances

     150        223   

Other borrowings

     44        44   

Trust Preferred Securities

     125        92   
  

 

 

   

 

 

 

Total Interest Expense

     1,712        2,552   
  

 

 

   

 

 

 

NET INTEREST INCOME

     6,653        8,089   

PROVISION FOR LOAN LOSSES

     1,176        2,312   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,477        5,777   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     642        607   

Fees, commissions and other income

     573        445   

Insurance and investment fees

     123        93   

Net realized gains on sale of investment securities

     265        —     

Life insurance investment income

     31        89   
  

 

 

   

 

 

 

Total Noninterest Income

     1,634        1,234   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     3,509        3,946   

Occupancy and equipment expense

     1,085        1,119   

Advertising and public relations

     121        98   

Data processing and telecommunications

     450        392   

FDIC insurance premiums

     414        421   

Other real estate owned and repossessed vehicles, net

     1,273        2,246   

Other operating expenses

     1,400        1,395   
  

 

 

   

 

 

 

Total Noninterest Expenses

     8,252        9,617   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (1,141     (2,606

INCOME TAX EXPENSE (BENEFIT)

     1,397        (931
  

 

 

   

 

 

 

NET LOSS

   $ (2,538   $ (1,675
  

 

 

   

 

 

 

Loss Per Share

    

Basic

   $ (0.25   $ (0.17
  

 

 

   

 

 

 

Fully Diluted

   $ (0.25   $ (0.17
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     10,010,178        10,010,178   
  

 

 

   

 

 

 

Fully Diluted

     10,010,178        10,010,178   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS)

(UNAUDITED)

 

     2012     2011  

Net Loss

   $ (5,073   $ (1,126

Other comprehensive income (loss):

    

Investment Securities Activity

    

Unrealized gains (losses) arising during the period

     214        126   

Tax related to unrealized gains (losses)

     (73     (43

Reclassification of realized (gains) during the period

     (337     —     

Tax related to realized gains

     114        —     
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (82     83   
  

 

 

   

 

 

 

Total comprehensive loss

   $ (5,155   $ (1,043
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 16,957      $ 18,306   

Interest-bearing deposits with banks

     54,029        72,170   

Federal funds sold

     2        77   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     70,988        90,553   

Investment securities

    

Available-for-sale

     46,187        32,434   

Loans receivable

     554,103        597,816   

Allowance for loan losses

     (18,065     (18,380
  

 

 

   

 

 

 

Net Loans

     536,038        579,436   

Bank premises and equipment, net

     32,763        33,141   

Equity securities (restricted)

     3,348        3,573   

Other real estate owned

     11,597        15,092   

Accrued interest receivable

     2,648        3,067   

Life insurance investments

     11,801        11,351   

Goodwill and other intangibles

     81        123   

Deferred taxes

     5,645        7,220   

Other assets

     4,519        4,394   
  

 

 

   

 

 

 

Total Assets

   $ 725,615      $ 780,384   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand deposits:

    

Noninterest bearing

   $ 108,799      $ 109,629   

Interest-bearing

     63,326        58,459   

Savings deposits

     91,820        94,569   

Time deposits

     405,392        445,658   
  

 

 

   

 

 

 

Total Deposits

     669,337        708,315   

Federal Home Loan Bank advances

     7,158        17,983   

Accrued interest payable

     1,954        1,796   

Accrued expenses and other liabilities

     1,502        1,471   

Other borrowings

     5,450        5,450   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     701,897        751,511   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

STOCKHOLDERS’ EQUITY

    

Common stock – $2.00 par value; 50,000,000 shares authorized;

     20,020        20,020   

10,010,178 shares issued and outstanding

    

Additional paid-in-capital

     21,689        21,689   

Retained earnings (deficit)

     (18,158     (13,085

Accumulated other comprehensive income

     167        249   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     23,718        28,873   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 725,615      $ 780,384   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

     Shares
of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
(Deficit)
    Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
    Total
Shareholders’
Equity
    Compre-
hensive
Income
(Loss)
 

Balance, December 31, 2010

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

Net loss

              (1,126       (1,126     (1,126

Unrealized gain on available-for-sale securities, net of $43 tax

                83        83        83   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

     10,010       $ 20,020       $ 21,689       $ (5,301   $ 72      $ 36,480        (1,043
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Net loss

              (5,073       (5,073     (5,073

Realized gains on available-for-sale securities, net of $114 tax

                (223     (223     (223

Unrealized gain on available-for-sale securities, net of $73 tax

                141        141        141   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     10,010       $ 20,020       $ 21,689       $ (18,158   $ 167      $ 23,718        (5,155
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS)

(UNAUDITED)

 

     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (5,073   $ (1,126

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

    

Depreciation

     1,277        1,245   

Provision for loan losses

     3,126        3,457   

Income (less expenses) on life insurance

     (450     (176

Gain on sale of securities available-for-sale

     (337     —     

(Gain) loss on sale of fixed assets

     (5     152   

Loss on sale of foreclosed real estate

     201        47   

Adjustment of carrying value of foreclosed real estate

     2,316        1,869   

Accretion of bond premiums/discounts

     238        4   

Deferred tax expense

     1,617        631   

Amortization of core deposit intangible

     42        58   

Net change in:

    

Interest receivable

     419        332   

Other assets

     (125     (2,452

Accrued interest payable

     158        75   

Accrued expenses and other liabilities

     31        (325
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     3,435        3,791   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     35,911        30,655   

Purchase of securities available-for-sale

     (27,109     (2,455

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

     13,331        2,853   

Sale of Federal Home Loan Bank stock

     225        145   

Payments for the purchase of premises and equipment

     (915     (1,204

Proceeds from sales of premises and equipment

     21        168   

Proceeds from sales of other real estate owned

     5,339        2,655   
  

 

 

   

 

 

 

Net Cash Provided by Investing Activities

     26,803        32,817   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repayment of line of credit borrowings

     —          (4,900

Net increase in other borrowings

     —          5,200   

Repayments to Federal Home Loan Bank

     (10,825     (5,600

Net change in:

    

Demand deposits

     4,037        10,544   

Savings deposits

     (2,749     (8,127

Time deposits

     (40,266     (27,344
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (49,803     (30,227
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (19,565     6,381   

Cash and Cash Equivalents, Beginning of Period

     90,553        82,529   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 70,988      $ 88,910   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Period for:

    

Interest

   $ 3,767      $ 5,441   

Taxes

   $ —        $ —     

Supplemental Disclosure of Non Cash Transactions:

    

Other real estate acquired in settlement of foreclosed loans

   $ 4,361      $ 3,362   

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.

NOTE 2    ACCOUNTING PRINCIPLES:

The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2012, and the results of operations for the three month and six month periods ended June 30, 2012 and 2011. 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, 2011. The results of operations for the three month and six month periods ended June 30, 2012 and 2011 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 is 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 June 30, 2012, we believe we have not yet achieved full compliance with the Written Agreement but we have made progress in our compliance efforts under the Written Agreement and all of the written plans required to date, as discussed in the following paragraphs, have been submitted on a timely basis.

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

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

 

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

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

NOTE 4    CAPITAL REQUIREMENTS:

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).

As of June 30, 2012, the Company remained below the minimum capital requirements as a result of the Tier 1 leverage ratio decreasing to 3.72%, which was below the minimum requirement of 4.00%. As of June 30, 2012 the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Company’s and Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table as of June 30, 2012 and December 31, 2011, respectively.

 

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

(Dollars are in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

June 30, 2012:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 41,632         9.07     36,726         8   $  N/A         N/A   

The Bank

     49,113         10.68     36,788         8     45,986         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     27,558         6.00     18,363         4     N/A         N/A   

The Bank

     43,213         9.40     18,394         4     27,591         6

Tier 1 Capital to Average Assets:

               

The Company

     27,558         3.72     29,666         4     N/A         N/A   

The Bank

     43,213         5.82     29,703         4     37,129         5

December 31, 2011:

               

Total Capital to Risk Weighted Assets

               

The Company

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

The Bank

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

Tier 1 Capital Risk Weighted Assets:

               

The Company

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

The Bank

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

 

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Tier 1 Capital to Average Assets:

               

The Company

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

The Bank

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

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
 

June 30, 2012

           

U.S. Government Agencies

   $ 26,012       $ 260       $ 56       $ 26,216   

Taxable municipals

     856         5         5         856   

Tax-exempt municipals

     —           —           —           —     

Mortgage backed securities

     19,066         92         43         19,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 45,934       $ 357       $ 104       $ 46,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

U.S. Government Agencies

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

Taxable municipals

     1,465         89         2         1,552   

Tax-exempt municipals

     1,043         11         —           1,054   

Mortgage backed securities

     8,144         67         16         8,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

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

 

 

    

 

 

    

 

 

    

 

 

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011.

 

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

June 30, 2012

                 

U.S. Government Agencies

   $ 7,125       $ 56       $ —         $ —         $ 7,125       $ 56   

Taxable municipals

     281         5         —           —           281         5   

Mtg. backed securities

     9,924         43         —           —           9,924         43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 17,330       $ 104       $ —         $ —         $ 17,330       $ 104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

U.S. Government Agencies

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

Taxable municipals

     572         2         —           —           572         2   

Mtg. backed securities

     4,055         16         —           —           4,055         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, the available-for-sale portfolio included twenty one investments for which the fair market value was less than amortized cost. At December 31, 2011, the available-for-sale portfolio included eleven investments for which the fair market value was less than amortized cost. Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. No securities had an other than temporary impairment.

The amortized cost and fair value of investment securities at June 30, 2012, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars are in thousands)

Securities Available for Sale

   Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Due in one year or less

   $ —         $ —           —  

Due after one year through five years

     1,527         1,529         1.02

Due after five years through fifteen years

     11,764         11,771         1.75

Due after fifteen years

     32,643         32,887         2.21
  

 

 

    

 

 

    

 

 

 

Total

   $ 45,934       $ 46,187         2.05
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Investment securities with a carrying value of $19.6 million and $15.7 million at June 30, 2012 and December 31, 2011, were pledged to secure public deposits, overnight payment processing and for other purposes required by law.

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading and are recorded at a cost of $3.3 million and $3.6 million as of June 30, 2012 and December 31, 2011, respectively.

NOTE 6    LOANS:

Loans receivable outstanding are summarized as follows:

 

(Dollars are in thousands)    June 30, 2012      December 31, 2011  

Real estate secured:

     

Commercial

   $ 160,710       $ 170,789   

Construction and land development

     25,288         32,389   

Residential 1-4 family

     244,520         255,998   

Multifamily

     12,944         14,320   

Farmland

     38,099         40,106   
  

 

 

    

 

 

 

Total real estate loans

     481,561         513,602   

Commercial

     33,677         39,327   

Agriculture

     5,287         6,147   

Consumer installment loans

     33,381         38,522   

All other loans

     197         218   
  

 

 

    

 

 

 

Total loans

   $ 554,103       $ 597,816   
  

 

 

    

 

 

 

Loans receivable on nonaccrual status are summarized as follows:

 

(Dollars are in thousands)    June 30, 2012      December 31, 2011  

Real estate secured:

     

Commercial

   $ 20,703       $ 19,169   

Construction and land development

     2,621         5,583   

Residential 1-4 family

     3,744         4,829   

Multifamily

     1,664         2,101   

Farmland

     9,075         5,257   
  

 

 

    

 

 

 

Total real estate loans

     37,807         36,939   

Commercial

     2,757         4,522   

Agriculture

     750         854   

Consumer installment loans

     15         1   

All other loans

     —           —     
  

 

 

    

 

 

 

Total loans receivable on nonaccrual status

   $ 41,329       $ 42,316   
  

 

 

    

 

 

 

Total interest income not recognized on nonaccrual loans for six months ended June 30, 2012 and 2011 was $777 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 June 30, 2012 and December 31, 2011:

 

As of June 30, 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

   $ 30,406       $ 539      $ 27,096       $ 30,208       $ —     

Construction and land development

     5,340         59        4,054         8,913         —     

Residential 1-4 family

     8,421         218        8,330         8,580         —     

Multifamily

     994         36        1,205         1,205         —     

Farmland

     8,433         (88     8,828         9,182         —     

Commercial

     3,116         40        2,791         3,369         —     

Agriculture

     579         8        617         617         —     

Consumer installment loans

     68         7        140         140         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

     14,739         151        16,677         17,339         3,778   

Construction and land development

     2,091         38        1,620         1,763         284   

Residential 1-4 family

     6,274         85        4,421         4,503         690   

Multifamily

     1,200         9        1,787         1,831         490   

Farmland

     5,658         37        4,352         4,436         788   

Commercial

     1,723         9        1,445         1,477         244   

Agriculture

     504         —          263         271         64   

Consumer installment loans

     93         3        60         60         18   

All other loans

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 89,639       $ 1,151      $ 83,686       $ 93,894       $ 6,356   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of December 31, 2011

(Dollars are in thousands)

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

With no related allowance recorded:

             

Real estate secured:

             

Commercial

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

Construction and land development

     14,288         125        6,954         12,838         —     

Residential 1-4 family

     6,406         315        8,221         8,296         —     

Multifamily

     619         31        613         613         —     

Farmland

     13,005         435        10,364         10,554         —     

Commercial

     2,958         60        3,529         4,070         —     

Agriculture

     396         1        521         817         —     

Consumer installment loans

     4         1        9         9         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

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

Construction and land development

     2,917         87        2,289         2,310         474   

Residential 1-4 family

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

Multifamily

     —           —          —           —           —     

Farmland

     2,354         119        4,192         4,192         605   

Commercial

     1,982         75        1,857         1,857         649   

 

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Table of Contents

Agriculture

     758         28         641         641         448   

Consumer installment loans

     41         3         43         43         24   

All other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

As of June 30, 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

   $ 5,386       $ 1,314       $ 10,422       $ 17,122       $ 143,588       $ 160,710       $ —     

Construction and land development

     730         142         510         1,382         23,906         25,288         48   

Residential 1-4 family

     8,275         1,964         4,006         14,245         230,275         244,520         2,880   

Multifamily

     163         1,842         —           2,005         10,939         12,944         —     

Farmland

     533         506         7,057         8,096         30,003         38,099         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     15,087         5,768         21,995         42,850         438,711         481,561         2,928   

Commercial

     377         73         2,134         2,584         31,093         33,677         62   

Agriculture

     162         15         306         483         4,804         5,287         —     

Consumer installment Loans

     666         59         58         783         32,598         33,381         47   

All other loans

     12         3         7         22         175         197         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 16,304       $ 5,918       $ 24,500       $ 46,722       $ 507,381       $ 554,103       $ 3,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

(Dollars are in thousands)

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

Real estate secured:

                    

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

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

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     268         88         458         814         5,333         6,147         3   

Consumer installment Loans

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

All other loans

     26         9         33         68         150         218         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

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

 

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Table of Contents

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.

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 June 30, 2012

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 105,571       $ 18,353       $ 36,642       $ 144       $ 160,710   

Construction and land development

     18,039         1,300         5,949         —           25,288   

Residential 1-4 family

     198,904         15,348         28,958         1,310         244,520   

Multifamily

     9,759         465         2,720         —           12,944   

Farmland

     22,954         1,725         13,420         —           38,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     355,227         37,191         87,689         1,454         481,561   

Commercial

     25,109         4,635         3,236         697         33,677   

Agriculture

     4,118         234         932         3         5,287   

Consumer installment loans

     31,567         608         1,128         78         33,381   

All other loans

     197         —           —           —           197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 416,218       $ 42,668       $ 92,985       $ 2,232       $ 554,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Pass     

Special

Mention

     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

     11,727         1,909         684         —           14,320   

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     4,743         678         726         —           6,147   

Consumer installment loans

     36,107         900         1,484         31         38,522   

All other loans

     218         —           —           —           218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 June 30, 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 June 30, 2012

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 5,671       $ (1,679   $ 1       $ —         $ 3,073      $ 7,066   

Construction and land development

     3,848         (280     69         —           (734     2,903   

Residential 1-4 family

     3,759         (679     24         —           235        3,339   

Multifamily

     148         —          —           —           426        574   

Farmland

     951         (187     —           —           383        1,147   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     14,377         (2,825     94         —           3,383        15,029   

Commercial

     1,883         (625     55         —           291        1,604   

Agriculture

     486         (2     11         —           (78     417   

Consumer installment loans

     781         (174     25         —           (140     492   

All other loans

     2         —          —           —           (1     1   

Unallocated

     851         —          —           —           (329     522   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 18,380       $ (3,626   $ 185       $ —         $ 3,126      $ 18,065   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of June 30, 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

   $ 3,778       $ 3,288       $ 7,066       $ 43,773       $ 116,937       $ 160,710   

Construction and land development

     284         2,619         2,903         5,674         19,614         25,288   

Residential 1-4 family

     690         2,649         3,339         12,751         231,769         244,520   

Multifamily

     490         84         574         2,992         9,952         12,944   

Farmland

     788         359         1,147         13,180         24,919         38,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,030         8,999         15,029         78,370         403,191         481,561   

Commercial

     244         1,360         1,604         4,236         29,441         33,677   

Agriculture

     64         353         417         880         4,407         5,287   

Consumer installment loans

     18         474         492         200         33,181         33,381   

All other loans

     —           1         1         —           197         197   

Unallocated

     —           522         522         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,356       $ 11,709       $ 18,065       $ 83,686       $ 470,417       $ 554,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

As of December 31, 2011

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

     42         —          —           —           106        148   

Farmland

     922         (511     66         —           474        951   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

     1,120         (1,031     18         —           379        486   

Consumer installment loans

     1,733         (694     123         —           (381     781   

All other loans

     —           —          —           —           2        2   

Unallocated

     6,163         —          —           —           (5,312     851   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of December 31, 2011

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

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

Construction and land development

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

Residential 1-4 family

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

Multifamily

     —           148         148         613         13,707         14,320   

Farmland

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

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

Commercial

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

Agriculture

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

Consumer installment loans

     24         757         781         52         38,470         38,522   

All other loans

     —           2         2         —           218         218   

Unallocated

     —           851         851         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

NOTE 8    TROUBLED DEBT RESTRUCTURINGS:

The following table presents information related to loans modified as troubled debt restructurings during the six and three months ended June 30, 2012 and 2011.

 

     For the six months ended
June 30, 2012
     For the six months ended
June 30, 2011
 

Troubled Debt Restructurings

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

     7       $ 991       $ 988         5       $ 3,779       $ 3,770   

Construction and land Development

     —           —           —           1         29         29   

Residential 1-4 family

     35         2,052         2,038         4         329         329   

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     42         3,043         3,026         10         4,137         4,128   

Commercial

     —           —           —           1         37         35   

Agriculture

     —           —           —           1         300         300   

Consumer installment loans

     3         25         21         4         67         65   

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     45       $ 3,068       $ 3,047         16       $ 4,541       $ 4,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the three months ended
June 30, 2012
     For the three months ended
June 30, 2011
 

Troubled Debt Restructurings

(Dollars are in thousands)

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

Real estate secured:

                 

Commercial

     —         $ —         $ —           3       $ 803       $ 803   

Construction and land Development

     —           —           —           1         29         29   

Residential 1-4 family

     34         2,002         1,989         3         205         205   

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     34         2,002         1,989         7         1,037         1,037   

Commercial

     —           —           —           —           —           —     

Agriculture

     —           —           —           —           —           —     

Consumer installment loans

     —           —           —           —           —           —     

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     34       $ 2,002       $ 1,989         7       $ 1,037       $ 1,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2012, the Company modified 45 loans that were considered to be troubled debt restructurings. We extended the terms for 6 of these loans and the interest rate was lowered for 35 of these loans. During the six months ended June 30, 2011, the Company modified 16 loans that were considered to be troubled debt restructurings. We extended the terms for 11 of these loans and the interest rate was lowered for 8 of these loans.

 

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Table of Contents

The following table presents information related to loans to modified as a troubled debt restructurings that defaulted during the six and three months ended June 30, 2012 and 2011, and within twelve months of their modification date. A troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

Troubled Debt Restructurings    For the six months ended
June 30, 2012
     For the six months ended
June 30, 2011
 
That Subsequently Defaulted      
During the Period    # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 
(Dollars are in thousands)            

Real estate secured:

           

Commercial

     4       $ 2,029         —         $ —     

Construction and land development

     —           —           —           —     

Residential 1-4 family

     1         113         —           —     

Multifamily

     —           —           —           —     

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5         2,142         —           —     

Commercial

     —           —           —           —     

Agriculture

     1         300         —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 2,442         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Troubled Debt Restructurings    For the three months ended
June 30, 2012
     For the three months ended
June 30, 2011
 
That Subsequently Defaulted      
During the Period    # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 
(Dollars are in thousands)            

Real estate secured:

           

Commercial

     1       $ 274         —         $ —     

Construction and land development

     —           —           —           —     

Residential 1-4 family

     —           —           —           —     

Multifamily

     —           —           —           —     

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1         274         —           —     

Commercial

     —           —           —           —     

Agriculture

     —           —           —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 274         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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. At June 30, 2012 there were $26.8 million in loans that are classified as troubled debt restructurings compared to $29.1 million at December 31, 2011.

 

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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 are determined by the Treasury method. For the three and six months ended June 30, 2012 and 2011, potential common shares were anti-dilutive and were not included in the calculation. Basic and diluted net loss per common share calculations follows:

 

(Amounts in Thousands, Except

Share and Per Share Data)

   For the three months
ended June 30,
    For the six months
ended June 30,
 
     2012     2011     2012     2011  

Net loss

   $ (2,538   $ (1,675   $ (5,073   $ (1,126

Weighted average shares outstanding

     10,010,178        10,010,178        10,010,178        10,010,178   

Dilutive shares for stock options

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average dilutive shares outstanding

     10,010,178        10,010,178        10,010,178        10,010,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per share

   $ (0.25   $ (0.17   $ (0.51   $ (0.11

Diluted loss per share

   $ (0.25   $ (0.17   $ (0.51   $ (0.11

 

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Table of Contents

NOTE 10    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 $46.2 million and $32.4 million at June 30, 2012 and December 31, 2011, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Loans – The Company does not record loans at fair value on a recurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. From time to time a loan is considered impaired and an allowance for loan losses is established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the impaired loan as nonrecurring Level 3. The aggregate carrying amount of impaired loans carried at fair value were $77.3 million and $85.8 million at June 30, 2012 and December 31, 2011, respectively.

Foreclosed Assets Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $11.6 million and $15.1 million at June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

Assets and liabilities measured at fair value are as follows as of June 30, 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

   $ —         $ 26,216       $ —     

Taxable municipals

     —           856         —     

Mortgage backed securities

     —           19,115         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           11,597   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           39,995   

Construction and land development

     —           —           5,390   

Residential 1-4 family

     —           —           12,061   

Multifamily

     —           —           2,502   

Farmland

     —           —           12,392   

Commercial

     —           —           3,992   

Agriculture

     —           —           816   

Consumer installment loans

     —           —           182   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 46,187       $ 88,927   
  

 

 

    

 

 

    

 

 

 

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

 

(Dollars are in thousands)    Quoted market
price in active
markets

(Level 1)
     Significant other
observable  inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 21,633       $ —     

Taxable municipals

     —           1,552         —     

Tax-exempt municipals

     —           1,054         —     

Mortgage backed securities

     —           8,195         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           15,092   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           43,321   

Construction and land development

     —           —           8,769   

Residential 1-4 family

     —           —           13,642   

Multifamily

     —           —           613   

Farmland

     —           —           13,951   

Commercial

     —           —           4,737   

Agriculture

     —           —           714   

Consumer installment loans

     —           —           28   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 32,434       $ 100,867   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the six months ended June 30, 2012 and 2011, the changes in other real estate owned Level 3 assets measured at fair value on a nonrecurring basis are summarized as follows (dollars in thousands):

 

(Dollars are in thousands)    June 30, 2012
Other Real
Estate Owned
    June 30, 2011
Other Real
Estate Owned
 

Balance, January 1

   $ 15,092      $ 12,346   

Acquired in settlement of loans

     4,361        3,362   

Proceeds from sale of other real estate owned

     (5,339     (2,655

Gain (Loss) on sale of other real estate owned

     (201     (47

Adjustments to carrying value

     (2,316     (1,869
  

 

 

   

 

 

 

Balance, June 30

   $ 11,597      $ 11,137   
  

 

 

   

 

 

 

For the six months ended June 30, 2012 and 2011, the changes in Level 3 assets measured at fair value on a nonrecurring basis are summarized as follows (dollars in thousands):

 

June 30, 2012

(Dollars are in thousands)

   Other Real
Estate Owned
    Impaired Loans     Total  

Balance, January 1

   $ 15,092      $ 85,775      $ 100,867   

Transfers into Level 3

     4,361        (8,445     (4,084

Included in earnings

     (2,517     —          (2,517

Sales and other reductions

     (5,339     —          (5,339
  

 

 

   

 

 

   

 

 

 

Balance, June 30

   $ 11,597      $ 77,330      $ 88,927   
  

 

 

   

 

 

   

 

 

 

 

June 30, 2011

(Dollars are in thousands)

   Other Real
Estate Owned
    Impaired Loans      Total  

Balance, January 1

   $ 12,346      $ 77,815       $ 90,161   

Transfers into Level 3

     3,362        8,084         11,446   

Included in earnings

     (1,916     —           (1,916

Sales and other reductions

     (2,655     —           (2,655
  

 

 

   

 

 

    

 

 

 

Balance, June 30

   $ 11,137      $ 85,899       $ 97,036   
  

 

 

   

 

 

    

 

 

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

   Fair Value at
June 30,
2012
     Valuation
Technique
   Significant
Unobservable Inputs
   Significant
Unobservable
Input Value

Impaired Loans

   $ 77,330       Appraised

Value/Discounted

Cash

Flows/Market

Value of Note

   Appraisals and/or

sales of comparable
properties/Independent
quotes

   n/a

Other Real Estate Owned

   $ 11,597       Appraised

Value/Comparable
Sales/Other

Estimates from
Independent

Sources

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

 

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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 June 30, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments during the months of June 2012 and December 2011.

 

                   Fair Value Measurements  

(Dollars are in thousands)

   Carrying
Amount
     Fair
Value
     Quoted market
price in active
markets

(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

June 30, 2012

              

Financial Instruments – Assets

              

Net Loans

   $ 536,038       $ 539,064       $ —         $ 461,734       $ 77,330   

Financial Instruments – Liabilities

              

Time Deposits

     405,392         409,577         —           409,577         —     

FHLB Advances

     7,158         7,158         —           7,158         —     

December 31, 2011

              

Financial Instruments – Assets

              

Net Loans

   $ 579,436       $ 588,888       $ —         $ 493,661       $ 85,775   

Financial Instruments – Liabilities

              

Time Deposits

     445,658         451,312         —           451,312         —     

FHLB Advances

     17,983         17,756         —           17,756         —     

NOTE 11    RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

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

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

 

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The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. 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. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

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 June 30, 2012, we believe we have not yet achieved full compliance with the Agreement but we have made progress in our compliance efforts under the Agreement. We are aggressively working to comply with the Agreement and have timely submitted each required plan by its respective deadline. We have hired an independent consultant to assist us in these efforts and the following actions have taken place:

 

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

 

  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.

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

In accordance with our capital plan, we have begun a common stock offering in July 2012 to existing shareholders followed by an offering to the public during the third quarter of 2012. We anticipate the closing of the offering to be on October 15, 2012 although it may be extended to no later than December 31, 2012.

 

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

 

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

 

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

The credit analysis function has been restructured and is a part of credit administration. The credit analysis function and independent appraisal reviews are now lead by a former seasoned lender who serves as Vice President and Credit Officer. This individual oversees a staff of four credit analysts and a certified licensed appraiser who serves as Appraisal Review Manager. The credit analysts review new and renewed loan

 

26


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relationships of $250 thousand or more prior to approval and annually reviews relationships of $500 thousand or more. The independent Appraisal Review Manager reviews the quality of appraisals on behalf of the Bank by reviewing the methods, assumptions, and value conclusions of internal and external appraisals. In addition, this data is used to determine whether an external appraiser should be utilized for future work.

 

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

 

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

 

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

 

  10. We have significantly increased our asset based liquidity sources throughout 2010, 2011 and 2012 to meet financial obligations. A new liquidity risk management policy has been adopted and a revised contingency funding plan has been created. We have lost all of our federal funds lines of credit, but we have added an internet certificate of deposit funding source to increase contingent funding sources. We believe that we have adequate liquidity in normal and stressed situations. We are further developing an investment portfolio, as well. The investment portfolio has grown to $46.2 million at June 30, 2012 from $4.7 million at December 31, 2010.

 

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

 

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

Overview

The Company had net loss for the quarter ended June 30, 2012 of $2.5 million as compared to a net loss of $1.7 million for the quarter ended June 30, 2011. Year-to-date June 30, 2012, the Company had a net loss of $5.1 million as compared to a net loss of $1.1 million for the same period in 2012. Basic net loss per share was $0.25 for the quarter ended June 30, 2012 as compared to basic net loss of $0.17 for the quarter ended June 30, 2011. Basic net loss per share was $0.51 for the six months ended June 30, 2012 as compared to net loss per share of $0.11 for the six months ended June 30, 2011. The net loss year-to-date is primarily the result of other real estate owned expenses of $3.2 million, of which $2.3 million is the result of other real estate owned properties writedowns, $3.1 million in loan loss provision, and a deferred tax valuation allowance of $2.9 million.

Total assets decreased to $725.6 million, or 7.02%, from $780.4 million at December 31, 2011. We intentionally are reducing 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 continue shrinking in the near future as we manage to maintain a well-capitalized status under regulatory guidelines at the Bank level and return to well-capitalized on a consolidated basis. Depending upon the success of the common stock offering being conducted in the third and fourth quarters 2012, we may not shrink the Bank at the rate as in the recent past.

At June 30, 2012, the Company remained below the minimum capital requirement for regulatory well-capitalized status as a result of the Tier 1 leverage ratio decreasing to 3.72%, which was below the minimum requirement of 4.00%. At December 31, 2011, the ratio was 4.23%. The Tier 1 risk based ratio was 6.00% at June 30, 2012, compared to 6.57% at December 31, 2011. The Total risked based capital ratio was 9.07% at June 30, 2012, compared to 9.15% at December 31, 2011. We anticipate returning the Company to well capitalized status in the third quarter when we convert the $5.5 million notes payable to two Board members to common stock subject to regulatory approval which we anticipate receiving in the third quarter of 2012.

 

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At June 30, 2012 the Bank remains well capitalized under the regulatory framework for prompt corrective action. The following ratios existed at June 30, 2012 for the Bank: Tier 1 leverage ratio of 5.82%, Tier 1 risk based capital ratio of 9.40%, and Total risk based capital ratio of 10.68%. The ratios were as follows at December 31, 2011: Tier 1 leverage ratio of 5.99%, Tier 1 risk based capital ratio of 9.28%, and Total risk based capital ratio of 10.56%.

In the second quarter of 2012, we experienced a decrease in our net interest margin to 4.02%, as compared to 4.28% for the same period in 2011. This is reflected in the $1.4 million decrease in net interest income during the second quarter of 2012 as compared to the same period in 2011 primarily related to the decreased loan portfolio and due to a one-time adjustment in which we reversed approximately $500 thousand in nonaccrual interest income from interest income and reduced the investment in nonaccrual loans.

Total loans decreased to $554.1 million at June 30, 2012 from $597.8 million at year end 2011. This is the result of charge offs of $3.6 million for the first half of 2012, resolution of problem loans, decreased loan demand, tighter underwriting guidelines, and the intentional shrinking of the loan portfolio to increase regulatory capital ratios. We continue to serve our customers, and although the total loan portfolio has shrunk, we have renewed existing credits and have made new loans to qualified borrowers as well. We anticipate continued decreases in the loan portfolio in the near future as we reduce our exposure to certain credit and market risks and decrease nonperforming loans. Increased focus is being made by the lending personnel to further develop new and existing lending relationships and will help slow the pace of total loans declining. Total deposits decreased $39.0 million from $708.3 million at December 31, 2011 to $669.3 million at June 30, 2012 as we have experienced shrinkage in time deposits due to the interest rate environment.

The deterioration of the residential and commercial real estate markets, as well as the extended recessionary period, have resulted in increases to our nonperforming assets. However, we are identifying potential problems early in an effort to minimize losses. The ratio of nonperforming assets to total assets is 7.69% at June 30, 2012 to 7.55% at December 31, 2011. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, decreased to $56.0 million at June 30, 2012 from $58.9 million at December 31, 2011. The majority of these assets are real estate development projects and commercial real estate secured loans. We are working aggressively to reduce these totals primarily by working with the customer for additional collateral, or restructuring the debt. However, we also may have to foreclose, repossess collateral or take other prudent measures. We are uncertain how long these processes will take. We believe we are making good progress and the level of nonperforming assets slightly decreased in the second quarter. In the first six months of 2012, net charge offs were $3.4 million as compared to $9.9 million in the same period of 2011. The majority of the charge offs in the first six months of 2012 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.

The provision for loan losses decreased $1.1 million, or 49.13%, to $1.2 million for the second quarter of 2012 as compared to $2.3 million in the same period for 2011. At June 30, 2012 our allowance for loan losses totaled $18.1 million, or 3.26% of total loans, as compared to $18.4 million, or 3.07% of total loans as of December 31, 2011. At June 30, 2011 our allowance for loan losses totaled $18.7 million, or 2.82% 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, 2011. 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

 

28


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rates and laws. If all or a portion of the net deferred tax asset is determined to be unlikely to be realized, a valuation allowance is established to reduce the net deferred tax asset to the amount that is more likely than not to be realized. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.

Balance Sheet Changes

At June 30, 2012, total assets were $725.6 million, a decrease of $54.8 million, or 7.02%, over December 31, 2011. Total deposits decreased $39.0 million, or 5.50%, for the first six months of 2012 to $669.3 million from $708.3 million at December 31, 2011. Total loans decreased $43.7 million, or 7.49%, to $554.1 million at June 30, 2012 from $597.8 million at December 31, 2011.

Core deposits remained substantially at the same level as noninterest bearing deposits slightly decreased 0.76%, or $830 thousand, from $109.6 million at December 31, 2011 to $108.8 million at June 30, 2012. 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 $4.8 million in interest bearing deposits and a $2.8 million decrease in savings deposits during the first six months of 2012.

We experienced a decrease in time deposits of $40.3 million. This is the result of decreased interest rates offered in this very low interest rate environment. During 2012, interest rate sensitive deposits have withdrawn to seek other investment opportunities. 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 $554.1 million at June 30, 2012 from $597.8 million at year end 2011. This is the result of charge offs of $3.6 million for the first six months of 2012, lower loan demand, tighter underwriting criteria, and resolution of problem loans. We plan to decrease the loan portfolio as we manage our capital levels to maintain the Bank’s and restore the Company’s well-capitalized status, reduce certain risks to various industry sectors that have posed higher risks in recent times and resolve nonperforming loans. Even as we decrease our loan portfolio, we still are committed to serving our customers. We have hired commercial lending personnel, continue to train our loan officers to meet the needs of our customers, and are developing new business with qualified borrowers that will ensure a stronger loan portfolio in the future.

Other real estate owned decreased $3.5 million, or 23.16%, to $11.6 million at June 30, 2012 from $15.1 million at December 31, 2011. During the first half of 2012, we acquired $4.4 million in other real estate owned as a result of settlement of foreclosed loans, which was offset by sales of $5.3 million of our properties with losses of $201 thousand realized as a result of the sales. We also had to record writedowns on other real estate owned properties in the amount of $2.3 million for the first half of 2012. 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 $1.4 million, or 17.75%, to $6.7 million for the second quarter of 2012 from $8.1 million for the same period in 2011. Our net interest margin decreased to 4.02% in the second quarter of 2012 as compared to 4.28% for the same period in 2011. This is the result of the level of nonaccrual loans of $41.3 million at June 30, 2012 which negatively affects the net interest margin as these loans are nonearning assets. It is also affected by the decreased volume of loans, which are typically higher earning assets. In addition, the adjustment related to nonaccrual interest accounting recognition resulted in a one-time reduction of interest income of approximately $500 thousand. We do not foresee this reoccurring.

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,

 

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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.

As the total assets decrease, we anticipate, however, that the net interest margin will still remain above 4%; accordingly, we are managing this critical source of earnings.

Noninterest Income

Noninterest income increased $400 thousand, or 32.41%, to $1.6 million in the second quarter of 2012 from $1.2 million for the same period in 2011. The increase is the result of a $265 thousand realized gain on the sale of investment securities and a $128 thousand increase in fees, commission, and other income. We expect noninterest income to remain flat throughout 2012 as a result of regulatory changes; however, we continue to seek opportunities to improve noninterest income.

Noninterest Expense

Noninterest expense totaled $8.3 million for the second quarter of 2012 as compared to $9.6 million for the second quarter of 2011. The primary contributor to the decrease in noninterest expenses for the quarter is the decrease in other real estate owned expenses of $973.

Salaries and benefits decreased $437 thousand in the quarter-to-quarter comparison from $3.9 million at June 30, 2011 to $3.5 million for the same period in 2012. We decreased staffing during 2011 and are now starting to realize the reduced expenses. Total full time equivalent employees have decreased to 287 at June 30, 2012 from 332 at June 30, 2011, a reduction of 45, or 13.55%. In addition, we have frozen salaries for the year 2012 in order to control this expense. In the year 2012, we also lowered the 401-k matching contribution from matching dollar for dollar on the 5% employee contribution to 3%. On May 31, 2012 we merged eight existing offices together to form four offices which reduced our total number of branches to 23. We anticipate annual pre-tax savings from these consolidations to be approximately $1.0 million. In the future, we are continuing to focus on reducing salary and benefits expenses.

Our efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, was 99.58% for the second quarter of 2012 as compared to 103.15% for the same period in 2011. Included in this calculation are the other real estate owned write-downs which significantly and negatively impact the ratio. We anticipate this ratio to improve in 2012 as we realize cost savings from staff reductions and the branch mergers that occurred in the second quarter of 2012. We believe that other real estate owned write-downs may reduce from the past as these have been primarily related to construction and development type properties that have been significantly impacted due to recent market valuation trends. Our level of these properties is much lower and reflect current market values.

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 modestly to $18.1 million at June 30, 2012 as compared to $18.4 million at December 31, 2011. Even so, the allowance for loan losses at June 30, 2012 was approximately 3.26% of total loans as compared to 3.07% at December 31, 2011 and 2.82% at June 30, 2011. Net loans charged off for the first six months of 2012 were $3.4 million, or 1.20% of average loans, and $9.9 million, or 2.89% of average loans, for the first six months of 2011. The provision for loan losses was $1.2 million for the second quarter of 2012 as compared with $2.3 million in the same period for 2011.

Loans delinquent greater than 90 days still accruing interest and loans in non-accrual status present higher risks of default and loan losses. At June 30, 2012, there were 148 loans in non-accrual status totaling $41.3 million, or 7.46% of total loans. At December 31, 2011, there were 170 loans in non-accrual status totaling $42.3 million, or 7.08% of total loans.

 

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The amounts of interest that would have been recognized on these loans were $777 thousand and $1.1 million for the six months ended June 30, 2012, 2012 and 2011, respectively. There were 39 loans past due 90 days or greater and still accruing interest totaling $3.0 million, or 0.55% of total loans at June 30, 2012. There were 47 loans past due 90 days or greater and still accruing interest totaling $1.5 million at year end 2011. It is our policy to stop accruing interest on a loan, and to classify that loan as non-accrual, under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. There were $26.8 million in loans classified as troubled debt restructurings as of June 30, 2012 as compared to $29.1 million in loans classified as troubled debt restructurings as of December 31, 2011. Of the loans classified as troubled debt restructurings at June 30, 2012, $7.8 million were in non-accrual status, compared to $8.2 million at December 31, 2011. We do not have any commitments to lend additional funds to non-performing debtors.

Certain risks exist in the Bank’s loan portfolio. Historically, we had experienced significant annual loan growth until the past couple of years. Consequently, there might be loans that have single pay maturities or demand loans that may be too new to have exhibited signs of weakness. A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize loss exposures in case of default. The recent negative trends in the national real estate market and economy continue to pose threats to our portfolio. With the exception of real estate development type properties which have experienced more deterioration in market values, the local residential and commercial real estate market values have shown some deterioration but remain relatively stable. It is uncertain as to when or if local real estate values will be more significantly impacted. We do not believe that there will be a severely negative effect in our market area, but because of the uncertainty we deem it prudent to assign more of the allowance to these types of loans. Our market area is somewhat diverse, but certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible if these industries experience a significant downturn although we do not believe this to be likely at least in the near future. We consider these factors to be the primary higher risk characteristics of the loan portfolio.

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 2011, we engaged a third party loan review firm to conduct quarterly loan reviews and have engaged them to perform this function in 2012. Upon their review, loans risk ratings may change from the rating assigned by the respective lender. We have experienced fewer rating changes in more recent reviews indicating better risk identification for the loan portfolio in light of the experience from the severe recession.

All loans classified as special mention, substandard, doubtful and loss are individually reviewed for impairment. In determining impairment, collateral for loans classified as substandard, doubtful and loss is reviewed to determine if the collateral is sufficient for each of these credits, generally through obtaining an appraisal. We generally consider an appraisal to be outdated when the appraisal is greater than 12 months old and the credit exhibits signs of weakness that warrant the possibility of relying on the collateral for repayment. An independent appraisal department reviews each appraisal to ensure compliance with the Uniform Standards of Professional Appraisal Practice (“USPAP”) requirements. The appraisal is further reviewed by the loan officer and Chief Credit Officer for reasonableness. If the appraisal value is questionable, an independent third party review of the appraisal is obtained. On adversely classified loans of all types, we may deem it necessary to obtain appraisals annually. If appraisals are obtained “as is,” we further discount the appraisals with an estimated selling cost of 10% for commercial and development properties and 6% for residential mortgages. If a current appraisal has not been obtained, we generally discount the most recent appraisal value by age: greater than one year through two years – 10%; two years to three years – 20%; greater than 3 years – 30%. We are further evaluating these loans with standard discounts to determine if updated appraisals are necessary and if the discounts are still relevant related to the current distressed real estate market as compared to the timing of the most recent appraisal. It is possible, in some circumstances, that the discount may be inadequate due to the timing of the last evaluation and current circumstances. In determining the ASC 450 component of our allowance, we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under ASC 310. If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made for the amount of the potential loss in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Impaired loans decreased to $83.7 million with $30.6 million requiring a valuation allowance of $6.4 million at June 30, 2012 as compared to $91.8 million with $30.0 million requiring a valuation allowance of $6.0 million at December 31, 2011. Of the $83.7 million recorded as impaired loans, $40.5 million were nonperforming loans, which includes nonaccrual loans and past due 90 days or more.

 

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Management is aggressively working to reduce the impaired credits at minimal loss.

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 $5.6 million existed at June 30, 2012 as compared to a deferred tax asset of $7.2 million at December 31, 2011. During the first half of 2012 a $2.9 million deferred tax asset valuation allowance was recorded, which increased the total valuation allowance to $5.6 million at June 30, 2012, compared to $2.7 million at December 31, 2011. Management reviewed the June 30, 2012 deferred tax calculation to determine the need for a valuation allowance. Based on the trend of reduced levels of earning assets and net interest income, we modified the projections of taxable income over the next three years and determined that an additional deferred tax asset valuation allowance was required. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management’s opinion, based on a three year taxable income projection, tax strategies which would result in potential securities gains and the effects of off-setting deferred tax liabilities, it is more likely than not that all the deferred tax assets, net of the $5.6 million allowance, would be realizable. Included in deferred tax assets are the tax benefits derived from net operating loss carryforwards totaling $3.8 million. Management expects to utilize all of these carryforwards prior to expiration. Direct charge-offs contributed to a reduction of the tax asset and are permitted as tax deductions. In addition, writedowns on other real estate owned property are expensed for book purposes but are not deductible for tax purposes until disposition of the property. Goodwill expense also was realized for book purposes in 2011 but continues to only be tax deductible based on the statutory requirements; thus, creating a deferred tax asset. When, and if, taxable income increases in the future and during the net operating loss carryforward period, this valuation allowance may be reversed and used to decrease tax obligations in the future. Our income tax expense was computed at the normal corporate income tax rate of 34% of taxable income included in net income. We do not have significant nontaxable income or nondeductible expenses.

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 $97.6 million at June 30, 2012 down from $107.3 million at December 31, 2011. We plan to maintain surplus short-term assets at levels adequate to meet potential liquidity needs during 2012.

At June 30, 2012, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $26.6 million, which is net of those securities pledged as collateral. This will primarily serve as a source of liquidity while yielding a higher return than other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. We have increased our investment portfolio from $32.4 million at December 31, 2011 to $46.2 million at March 31, 2012. Our strategy is to further develop the investment portfolio for the Bank. We foresee purchasing additional securities in the near future as opportunities arise.

Our loan to deposit ratio decreased to 82.78% at March 31, 2012 from 84.40% at year end 2011. We anticipate this ratio to remain below 90% as we continue to decrease our loan portfolio throughout 2012. We can further lower the ratio as management deems appropriate by managing the rate of growth in our loan portfolio and by offering special promotions to entice new deposits. This can be done by changing interest rates charged or limiting the amount of new loans approved.

Available third party sources of liquidity remain intact at June 30, 2012 which includes the following: our line of credit with the Federal Home Loan Bank of Atlanta, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond.

At June 30, 2012, we had borrowings from the Federal Home Loan Bank totaling $7.2 million as compared to $18.0 million at December 31, 2011. None is 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 $10.8 million was due to regularly scheduled principal payments and the early payoff of the term notes of $10.2 million during the second quarter of 2012 that were to mature in the third quarter 2012. We incurred $90 thousand in prepayment penalties during the second quarter as a result of this early payoff; however, with securities gains realized on the sales of some investment securities with future interest expense reductions related to the term borrowing with the FHLB, we anticipate approximately a $125 thousand increase in earnings by year end 2012. We also used our line of credit with the Federal Home Loan Bank to issue a letter of credit for $7.0 million in 2008 and $3.0 million in 2010 to the Treasury Board of Virginia for collateral on public funds. An additional $41.0 million was available on June 30, 2012 on the $58.1 million line of credit which is secured by a blanket lien on our residential real estate loans.

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

 

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

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

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

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

Concerning the Company’s liquidity, we continue to work on enhancing the Company’s liquidity. At the end of June 2012, we obtained regulatory approval to extend the director notes until December 31, 2012. We anticipate converting these notes to common stock on or around September 15, 2012 subject to regulatory approval.

Capital Resources

Total capital at the end of the second quarter of 2012 was $23.7 million as compared to $29.0 million at the end of December 31, 2011. The decrease was due to the net loss of $5.1 million for the first half of 2012, which was primarily the result of other real estate owned expenses and writedowns, loan loss provisions and the deferred tax asset valuation allowance expense. The Bank was well capitalized as of June 30, 2012, as defined by the capital guidelines of bank regulations, however, the Company continued to be below the minimum capital requirements as a result of the Tier 1 leverage ratio decreasing to 3.72%, which was below the minimum requirement of 4.00%. Subject to the conversion of the director notes, we expect to return to well-capitalized status at the holding company level in 2012. The Company’s capital as a percentage of total assets was 3.27% at June 30, 2012 compared to 3.70% at December 31, 2011.

Total assets decreased during the first half of 2012 and we anticipate further decreasing assets to be the trend in 2012. We developed a new strategic plan and capital plan in 2011. Under current economic conditions, we believe it is prudent to increase capital to absorb potential losses that may occur if asset quality deteriorates further. We are aware that capital needs and requirements are affected by the level of problem assets, growth, earnings and other factors. Retained earnings are not alone sufficient to provide for this economic cycle and we believe we will need access to additional sources of capital. As part of our initiative to improve regulatory capital ratios, we are further reducing our higher risk assets, which results in a shrinking loan portfolio. Deposit growth is primarily focused on growing core deposits, which are mainly transaction accounts, commercial relationships and savings products. We are focused on improving earnings by maintaining a strong net interest margin and decreasing overhead expenses. These options we are fully implementing to increase capital. However, these efforts alone may not provide us adequate capital if further loan losses are realized.

We commenced an offering of our common stock pursuant to a registration on Form S-1 with the US Securities and Exchange Commission which became effective on July 6, 2012. We are conducting a rights offering and an offering of common stock to the public on a best efforts basis at a price of $1.50 per share. We mailed the offering prospectus to our shareholders on July 16, 2012 to initiate the rights offering. The public offering will commence upon completion of the rights offering which may be extended to (but not beyond) September 15, 2012. The public offering is scheduled to close on October 15, 2012, but may be extended to (but not beyond) December 31, 2012. The maximum being offered in the offering is $25.0 million and a minimum of $10.0 million must be sold in order to complete the offering. The offering provides for the issuance of one warrant to acquire one share of our common stock for each five shares purchased in the offering. The warrants are immediately exercisable and valid for five years. The rights offering and the public offering are being conducted to raise sufficient capital to comply with our capital plan, as approved by federal and state bank regulatory agencies. For more information please refer to our Prospectus dated July 6, 2012.

We currently have two outstanding borrowings totaling $5.45 million plus accrued interest to two directors. The maturity date of these notes has been extended to December 31, 2012. The Company is obligated to convert the debt into the Company’s common stock if, before the stated maturity, and on the same terms, including price, on which it is offered in the common stock offering. Upon conversion of the notes, additional capital will be realized at the Company level and is expected to return the Company to well capitalized status at that time. The notes were modified in June 2012 to allow the Company to convert the notes partially or in full. The directors have applied with the Federal Reserve Bank of Richmond to permit ownership in excess of 10% of the Company’s common stock. This application is pending approval; however, we expect it to be approved. If for unforeseen reason the application is not approved, to the extent permissible without regulatory approval we will most likely convert the notes in partial to increase capital levels before the end of the third quarter of 2012.

 

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No cash dividends have been paid historically and none are anticipated in the foreseeable future.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the quarter ended June 30, 2012 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, 2011.

 

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 “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 June 30, 2012 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.

The Bank is a co-defendant in a case brought by VFI Associates LLC, Burke LPI and Nicewonder, LPI in the Circuit Court of Russell County, Virginia on March 2, 2010. The main claim is that the Bank’s former President and a former Senior Vice President imputed liability to the Bank through their conduct in a personal business venture and that an unrecordable ground lease entered into after the Bank’s deed of trust was recorded is superior in right. The relief sought is principally equitable in nature and not for money damages. The Bank believes it will prevail in the litigation.

 

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

 

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Item 5. Other Information

Recent Developments

On August 14, 2012, the Board of Directors of New Peoples Bankshares, Inc. voted to extend the deadline for the common stock rights offering to August 31, 2012.

 

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:

   

August 14, 2012

By:    

/s/ C. TODD ASBURY

   

C. Todd Asbury

    Executive Vice President and Chief Financial Officer

Date:

    August 14, 2012

 

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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.
  4.2    Form of Warrant to Purchase Shares of Common Stock.
  4.3    Form of Rights Certificate.
  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.
  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 June 30, 2012, 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. (1)

 

* Denotes management contract.
(1)  

Furnished, not filed.

 

37

Exhibit 4.1

 

LOGO


The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

 

TEN COM   -   as tenants in common    UNIF GIFT MIN ACT-  

 

  Custodian  

 

TEN ENT   -   as tenants by the entireties      (Cust)     (Minor)
JT TEN   -   as joint tenants with right of survivorship and not as tenants in common        under Uniform Gifts to Minors
         Act  

 

           (State)

Additional abbreviations may also be used though not in the above list.

For Value Received,                             hereby sell, assign and transfer unto

 

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE   
 
      

 

 

 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)

 

 

 

 

  Shares of
the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint  

 

 

 

  Attorney

to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises.

 

Dated:  

 

 

x  

 

x  

 

NOTICE:  

THE SIGNATURE(S)TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR,

WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

 

Signature(s) Guaranteed
BY:  

 

  THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

Exhibit 4.2

 

LOGO


1. Number of Shares Available Under this Warrant; Exercise Price: Expiration.

1.1 Number of Shares. The Registered Holder is entitled to purchase the number of shares of NPB’s common stock specified on the face of this warrant under the terms of this warrant. NPB shall reserve for issuance to the Registered Holder the shares that can be acquired or exercised pursuant to this warrant. The warrants are being issued pursuant to the offering the terms and conditions of which are set forth in NPB’s Prospectus dated                     2012 (the “Prospectus”) and are incorporated herein by reference. Copies of the Prospectus may be obtained from Registrar and Transfer Company, the Warrant Agent (“RT”).

1.2 Exercise Price. The exercise price (“Purchase Price”) for each share to be acquired by the Registered Holder by exercise of this warrant is $1.75.

1.3 Expiration. This warrant is exercisable upon issuance and at any time thereafter until 5:00 p.m., local time in Cranford, N.J. on                     (the “Expiration Time”). After the Expiration Time, no unexercised portion of this warrant shall be exercisable.

2. No Fractional Shares. In the event that the exercise of this warrant would result in the issuance of a fractional share of common stock (that is, in the issuance of less than one whole share of common stock), the fraction shall be disregarded and the Registered Holder shall not be entitled to any compensation therefor.

3. Adjustments of Number of Shares Issuable Upon Exercise of Warrant. The exercise price and the number of shares underlying the warrant are subject to appropriate adjustment in the even of stock splits, reverse stock splits, stock dividends on NPB’s common stock, stock combinations or similar events affecting NPB’s common stock. In addition, in the event of any merger, consolidation, sale or other reorganization event in which NPB’s common stock is converted into or exchanged for securities, cash or other property, then following such event, the Registered Holder will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property which the holders would have received had they exercised the warrants immediately prior to the reorganization event.

Except to the extent specified in Section 3, the Registered Holder shall not be entitled to any adjustment as a result of the issuance of common shares for value, including, by way of example only, the sale of authorized but unissued common shares or the issuance of shares pursuant to any equity incentive or compensation plan, the exercises of options or warrants, or any other issuance of any securities of NPB for value.

4. Covenants of NPB. NPB agrees that all shares which may be issued upon the exercise of this warrant shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable and free from all preemptive rights of any shareholder and all taxes, liens and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such Issue).

5. Warrant Registered Holder Not Deemed a Shareholder. The Registered Holder of this warrant, as such, is not entitled to vote or receive dividends or have the rights associated with the owner of common shares for any purpose, as such, any right to vote, give or withhold consent to any corporate action, receive notice of meetings, receive dividends, or subscription rights, or otherwise, prior to the issuance of record to the Registered Holder the shares to the Registered Holder upon the exercise of this warrant.

6. Limitations On Exercise of Warrants. This warrant may be exercised in whole and in part on one or more occasions; provided, that partial exercises shall be for not fewer than the purchase of the lesser of (a) not less than one hundred (100) shares or (b) all shares then available for exercise under the warrant. The Registered Holder may exercise the same by surrendering this warrant, with the form of subscription at the end hereof duly executed by such Registered Holder accompanied by payment in U.S. Dollars by personal check drawn on a U.S. bank, including New Peoples Bank, or a cashier’s check drawn only on New Peoples Bank, Inc. payable as set forth below or by wire transfer as provided below.

7. Non-Transferability of Warrants. The Registered Holder understands that NPB shall not permit the purchase of any shares under this warrant by any person other than the Registered Holder or transferees by operation of the law. This warrant is not transferable except by operation of the law. The Registered Holder further understands that only the Registered Holder may exercise or attempt to exercise this warrant. The warrants are not attached to the shares that were offered in the offering in connection with which the warrants were issued. If these shares are transferred by the Registered Holder, the Registered Holder will retain the related warrants.

8. Notices . All communications hereunder shall be In writing mailed by registered or certified mail, hand delivery or delivered by courier, if to NPB to 67 Commerce Drive, Honaker VA 24260, Attention: President; or if to Registrar and Transfer Company, the Warrant Agent, to 10 Commerce Drive, Cranford N.J. 07016, Attention: Reorg/Exchange Department. All communications hereunder shall be in writing and, If sent to the Registered Holder, shall be mailed by registered or certified mall, hand delivered or delivered by courier, to the address of such Registered Holder as set forth in NPB’s or Registrar and Transfer’s records. The Registered Holder may change his, her or its address by proper notice to NPB and Registrar and Transfer sent in conformity with this Section. Risk of non-transmission or untimely delivery of any notice shall be and remain at all times on the Registered Holder.

DELIVERY OPTIONS FOR SHARES

By Mail, Hand or Overnight Courier:

Registrar & Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016

Attention: Reorg/Exchange Department

Delivery to an address other than the address listed above will not constitute valid delivery.

Delivery by facsimile will not constitute valid delivery.

PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY

IF YOU WISH TO EXERCISE ALL OR A PORTION OF YOUR WARRANTS

 

I exercise  

 

  warrants x 1.00. =  

 

  
      (no. of warrants)             (total no. of your new shares)       

Therefore, I apply for:

 

 

  x $1.75 = $  

 

  
    (no. of new shares)             (amount enclosed)       

TO EXERCISE: I acknowledge that I received the Prospectus and I hereby irrevocably exercise the number of warrants set forth above for the number of shares indicated above on the terms and conditions specified in the Prospectus. I hereby agree that if I fail to pay for the shares which I have subscribed, the Company may exercise its legal remedies against me.

 

 

Signature(s) of Subscriber(s)

                    Indicate, by initialing in the provided blank, that you are aware of the absence of deposit insurance covering the securities being sold pursuant to this Warrant Certificate.

IMPORTANT: THE SIGNATURE(S) MUST CORRESPOND IN EVERY PARTICULAR, WITHOUT ALTERATION, WITH THE NAME(S) AS PRINTED ON THE REVERSE OF THIS WARRANT CERTIFICATE.

If signature is by trustee(s), executor(s), administrator(s), guardians(s), attorney(s)-in-fact, agent(s),officer(s) of a corporation or another acting in a fiduciary or representative capacity, please provide the following information (please print). See the instructions.

 

Name(s):  

 

    Taxpayer ID# or Social Security #:  

 

 

Capacity (Full Title)   

 

FULL PAYMENT FOR THE SHARES MUST ACCOMPANY THIS FORM AND MUST BE MADE IN U.S. DOLLARS BY PERSONAL CHECK DRAWN ON A U.S. BANK, INCLUDING NEW PEOPLES BANK, OR BY A CASHIER’S CHECK DRAWN ONLY ON NEW PEOPLES BANK OR WIRETRANSFER PAYABLE TO REGISTRAR AND TRANSFER COMPANY.

Exhibit 4.3

 

LOGO


DELIVERY OPTIONS FOR RIGHTS CERTIFICATE

By Mail, Hand or Overnight Courier:

Registrar & Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016

Attention: Reorg/Exchange Department

Delivery to an address other than the address listed above will not constitute valid delivery.

Delivery by facsimile will not constitute valid delivery.

PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY.

 

SECTION 1

IF YOU WISH TO SUBSCRIBE FOR YOUR FULL SUBSCRIPTION PRIVILEGE OR A PORTION THEREOF:

Basic Subscription Right

 

I exercise  

 

  rights   x  

  1.665 

  =  

 

  (no. of your rights)       (ratio)     (total no. of your new shares)

Therefore, I apply for:

 

 

  x   $  

            1.50             

  =   $  

 

(no. of new shares)     (subscription price)     (amount enclosed)

Over-Subscription Privilege

If you fully exercise your Basic Subscription Right and wish to subscribe for additional shares up to the total number of unsubscribed shares, you may exercise your Over-Subscription Privilege. If sufficient shares of Common Stock are available, the Company will seek to honor the over-subscription requests in full

The maximum number of unsubscribed shares:

 

 

  -  

 

  =  

 

  shares
(total offered shares)    

  (total number of

  your new shares)

    (maximum unsubscribed shares)

Therefor, I apply for:

 

 

  X   $  

1.50

  =   $  

 

(no. of oversubscription

shares applied for)

      (subscription price)       (additional amount enclosed)

 

Total Amount Enclosed: $  

 

     (Sum of Basic Plus Over-Subscription Amounts)

 

¨ Check drawn on a U.S. bank payable to “Registrar and Transfer Company,” as Subscription Agent.

 

¨ Wire transfer directly to the segregated account maintained by Registrar and Transfer Company, as Subscription Agent.

TO SUBSCRIBE: I acknowledge that I have received the prospectus for this offering and I hereby irrevocably subscribe for the number of shares indicated above on the terms and conditions specified in the prospectus. I hereby agree that if I fail to pay for the shares of Common Stock for which I have subscribed, the Company may exercise its legal remedies against me.

 

 

Signature(s) of Subscriber(s)

                     Indicate, by initialing In the provided blank, that you are aware of the absence of deposit insurance covering the securities being sold pursuant to this Subscription Certificate.

IMPORTANT: THE SIGNATURE(S) MUST CORRESPOND IN EVERY PARTICULAR, WITHOUT ALTERATION, WITH THE NAME(S) AS PRINTED ON THE REVERSE OF THIS SUBSCRIPTION CERTIFICATE.

If signature is by trustee(s), executor(s), administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s) of a corporation or another acting in a fiduciary or representative capacity, please provide the following information (please print). See the instructions.

 

Name(s):  

 

 

Capacity (Full Title):  

 

 

Taxpayer ID # or Social Security #:  

 

SECTION 2

SPECIAL ISSUANCE OR DELIVERY INSTRUCTIONS FOR SUBSCRIPTION RIGHTS HOLDERS:

(a) To be completed ONLY if the certificate representing the Common Stock is to be issued in a name other than that of the registered holder. (See the Instructions.) DO NOT FORGET TO COMPLETE THE GUARANTEE OF SIGNATURE(S) SECTION BELOW.

ISSUE COMMON STOCK TO:

 

  

 

(Please Print Name)

 

  

 

(Print Full Address)

 

  

 

(Social Security # or Tax ID #)

(b) To be completed ONLY If the certificate representing the Common Stock is to be sent to an address other than that shown on the front of this certificate. (See the Instructions.) DO NOT FORGET TO COMPLETE THE GUARANTEE OF SIGNATURE(S) SECTION BELOW

 

  

 

(Please Print Name)

 

  

 

(Print Full Address)

 

  

 

(Social Security # or Tax ID #)

GUARANTEE OF SIGNATURE(S)

YOU MUST HAVE YOUR SIGNATURE GUARANTEED IF YOU WISH TO HAVE YOUR SHARES DELIVERED TO AN ADDRESS OTHER THAN YOUR OWN OR TO A SHAREHOLDER OTHER THAN THE REGISTERED HOLDER.

Your signature must be guaranteed by an Eligible Guarantor Institution, as defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended. These generally include (a) a commercial bank or trust company, (b) a member firm of a domestic stock exchange, or (c) a credit union.

 

Signature:  

 

  (Name of Bank or Firm)

 

By:  

 

  (Signature of Officer)
 

 

FULL PAYMENT FOR THE SHARES MUST ACCOMPANY THIS FORM AND MUST BE MADE IN UNITED STATES DOLLARS BY PERSONAL CHECK DRAWN UPON A UNITED STATES BANK OR WIRE TRANSFER PAYABLE TO REGISTRAR AND TRANSFER COMPANY.

Exhibit 10.8

 

LOGO

 

 

    Investment Banking Group
    901 East Byrd Street
    Suite 410
    Richmond, VA 23219
    (804) 782-8894 (Phone)
October 29, 2010     (804) 649-0990 (Fax)

CONFIDENTIAL

Mr Jonathan H. Mullins

Chief Executive Officer

New Peoples Bankshares, Inc.

67 Commerce Drive

P.O Box 1810

Honaker, VA 24260

Dear Mr. Mullins.

Scott & Stringfellow, LLC (“S&S”) is pleased to set forth in this letter (the “Agreement”) the terms of the exclusive engagement by New Peoples Bankshares, Inc. (the “Company”) of S&S related to providing financial advisory and investment banking services in connection with certain strategic assessments and transactions, which may include an offering of the Company’s common stock to investors (the “Offering”), the terms of which are discussed herein. It is intended that the Offering will initially consist of a private placement of such common stock with qualified investors identified by the Company (“Company Investors”) and other qualified investors identified by S&S (“S&S Investors”) with priority in the case of over-subscription given to Company Investors In the event that insufficient subscriptions are obtained from the private placement process, the Company may elect to offer pursuant to this Agreement additional common stock in a public offering, including a rights offering to existing shareholders (a “Public Offering”)

 

  1. S&S’s Responsibilities

In connection with this engagement, S&S will provide the following services related to the Offering

 

  (a) determine the minimum amount of capital to be raised and an appropriate offering price range,

 

  (b) assist the Company and Company counsel in preparing the offering documentation to be distributed to potential investors;

 

  (c) prepare an investor presentation with management of the Company and assist in the coordination of investor meetings both with respect to Company Investors, S&S Investors and any potential investors in a Public Offering;

 

  (d) assist in the communication process with potential investors and existing shareholders;

 

  (e) meet with the board of directors and management to discuss any of these services; and,


Mr. Jonathan H Mullins

October 29, 2010

Page 2 of 7

 

  (f) provide such other financial advisory and investment banking services in connection with the Offering as may be agreed upon by S&S and the Company

The scope of S&S’s engagement shall be limited to those matters expressly set forth in this Agreement. For the sake of clarity, the scope of S&S’s engagement shall not include giving tax, legal, regulatory, accountancy or other specialist or technical advice

 

  2. The Company’s Responsibilities

(a) The Company will provide S&S with access to the directors, officers and key employees and any other corporate information of the Company as S&S may reasonably request, including all information (financial or otherwise), data, opinions, appraisals, valuations, other information and materials relating to the Company that is relevant to the Offering. The Company will ensure that all information concerning the Company provided to S&S by the Company and its directors, officers, employees, agents and advisors in any form will be accurate and complete in all material respects, and will not be misleading in any material respect. S&S may rely on such information without verification S&S shall not be required to physically inspect any assets or to prepare or obtain any independent evaluation or appraisal of any of the assets or liabilities of the Company or to make any determination as to the solvency of any party S&S shall be entitled to assume that any projections prepared by the Company have been reasonably prepared and reflect the best currently available estimates and judgments of the party preparing or providing such projections.

(b) The Company further acknowledges that it will ensure that all information concerning the Company to be provided to S&S, directly or indirectly, orally or in writing, by the Company and its directors, officers, employees, agents and advisors will be accurate and complete in all material respects, and will not be misleading in any material respect. S&S will be entitled to rely on, and will be under no obligation to verify, the accuracy or completeness of such information.

(c) The Company agrees to notify S&S promptly in writing of any material change, actual or contemplated, relating to the Company’s business, operations, affairs, condition (financial or otherwise) or prospects, which would render untrue any statement of material fact made to S&S or material information furnished to S&S, or which would constitute an omission to state a material fact necessary to make any statement of material fact made to S&S or material information furnished to S&S not misleading in light of the circumstances in which it was made or furnished.

(d) The Company acknowledges that in carrying out S&S’s services hereunder, S&S will be relying on information prepared and supplied by the Company, its directors, officers, employees, agents and advisors. Subject to the exercise of S&S’s professional judgment, S&S will be entitled to rely on, and will be under no obligation to verify, the accuracy or completeness of such information. Subject to applicable securities law requirements, S&S will not be under any obligation to investigate any changes which may occur in such information subsequent to the date thereof, unless the Company specifically requests S&S to investigate such changes.

(e) In order to coordinate most effectively our efforts to effect an Offering, the Company will promptly inform S&S of any inquiry it may receive concerning the availability of any material portion of the securities or assets of the Company for purchase outside of the ordinary course of business. During the period of S&S’s engagement, neither the Company nor its representatives will initiate any discussions looking toward the sale of any portion of the securities or assets of Company outside the ordinary course of business without first consulting with S&S


Mr. Jonathan H Mullins

October 29, 2010

Page 3 of 7

 

  3. S&S’s Fees

(a) As compensation for S&S’s financial advisory and general investment banking services hereunder, the Company agrees to pay to S&S (1) a non-refundable financial advisory fee (“Advisory Fee”) equal to $150,000 with (i) $50,000 due and payable upon execution of this Agreement and (ii) $25,000 due and payable on the first business day of each of the first four consecutive months following the execution of this Agreement This Advisory Fee compensates S&S for all prior and future consulting, modeling, and other services associated with our relationship with the Company

(b) S&S has no obligation to take or purchase any shares of common stock in connection with the Offering; however, S&S has agreed to use its commercially reasonable efforts in the placement with investors of shares in the Offering If S&S places shares with investors in the Offering, S&S will receive a placement fee (the “Placement Fee”) of 6.5% of the aggregate dollar amount of common stock sold by S&S to S&S Investors and to investors in any Public Offering pursuant hereto and 1.5% of the aggregate dollar amount of common stock sold to Company Investors As further compensation for S&S’s services to be provided in connection with an Offering, the Company agrees to pay S&S upon completion of the Offering, a success fee (the “Success Fee”) equal to 1 5% of the aggregate dollar amount of common stock raised in an Offering. This fee will be in addition to the Placement Fee set forth above However, the Placement Fee and the Success Fee shall be reduced as necessary to ensure that the overall underwriting compensation as determined pursuant to FINRA Rule 5110 to be received by S&S in connection with a Public Offering pursuant to this Agreement, including without limitation, the portions of the Advisory Fee, the Placement Fee, the Success Fee and the reimbursements contemplated pursuant to Section 3(e) below related to such Public Offering, shall not exceed on an aggregate basis 8.0% of the aggregate offering proceeds of such Public Offering.

(c) The Company will pay all of its fees and expenses in connection with the Offering, including without limitation, filing and registration fees, travel, printing costs for the offering documentation, accounting fees, legal fees, and roadshow expenses In addition, the Company will pay the reasonable out-of-pocket fees and disbursements of counsel to S&S in connection with the qualification of the common stock, or any required notices or filings, under state securities or blue sky laws

(d) In addition, whether or not a Offering is consummated, the Company agrees to reimburse S&S, upon request, for its reasonable, accountable out-of-pocket expenses related to this engagement including S&S’s attorneys’ fees, any road show expenses and any expenses and attorney fees for S&S services in the event S&S (or any of its directors, officers, agents or professional advisors) is required to testify or participate in any legal or other proceedings before any court or regulatory authority, in connection with its services hereunder, which out-of-pocket expenses shall not exceed $50,000 on a aggregate basis ( provided , however, that such expense cap in no way limits or impairs the provisions of Section 4 hereof). Subject to Section 4 hereof, the Company shall not be liable for any fees, costs or expenses incurred by S&S in connection with any arbitration or litigation between the Company and S&S regarding this Section 3 unless S&S is the substantially prevailing party therein.

(e) In the event a Public Offering is commenced and is subsequently terminated, S&S shall receive only the compensation permitted by FINRA Rule 5110(F)(2)(D) in connection with such Public Offering


Mr. Jonathan H. Mullins

October 29, 2010

Page 4 of 7

 

  4. Indemnity

The Company and S&S agree to the provisions relating to indemnity and liability set forth in Annex A .

 

  5. Term of Agreement

This Agreement may be terminated by the Company or S&S at any time and without liability or further obligation to the Company or S&S (except for compensation earned and reimbursable expenses incurred to the date of termination) upon prior written notice to the other party. Notwithstanding the foregoing, however, S&S shall be entitled to its full compensation as contemplated pursuant to this Agreement in the event that, at any time prior to the expiration of 24 months after written termination by the Company, an Offering of the type described in this Agreement is consummated solely through a private placement with an advisor or agent other than S&S, Additionally, by execution of this Agreement, the Company hereby commits to provide S&S with a right of first refusal to serve as advisor, agent or underwriter for any future capital raise or financial advisory engagement, including merger, acquisition or reorganization transactions, that the Company undertakes within 24 months of the closing or termination of the Offering. Furthermore, the indemnity provisions of Section 4 of this Agreement and the waiver of the right to trial by jury provision and other provisions of Section 6(c) hereof will remain operative regardless of such termination.

 

  6. Other Matters

(a) S&S and the Company confirm their understanding and agreement that the Company has retained S&S hereunder as an independent contractor, and not as a fiduciary or agent, and solely for the Company’s benefit and not for the benefit of any third party, including the Company’s security holders and creditors. The scope of S&S’s engagement shall be limited to those matters expressly set forth in this Agreement For the sake of clarity, the scope of S&S’s engagement shall not include giving tax, legal, regulatory, accountancy or other specialist or technical advice.

(b) S&S is an affiliate of BB&T Corporation, which through its subsidiaries and affiliates provides full-service securities trading and brokerage services and other investment banking and financial advisory services. In the ordinary course of its trading and brokerage activities, one or more of S&S’s affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or for the account of customers, in the securities or options or other derivatives relating to the securities of the Company S&S recognizes its responsibility for compliance with federal laws in connection with such activities. This Agreement shall not limit or preclude BB&T Corporation, S&S or any of their affiliates (a) from carrying on any business with, from providing banking or other financial services to, or from participating in any capacity (including as an equity investor, in any party whatsoever) including without limitation, any competitor, supplier or customer of the Company, or any other party which may have interests different from or adverse to the Company, or (b) from carrying on its business as currently conducted or as such business may be conducted in the future

(c) This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia, without giving effect to that state’s principles of conflict of law. Any claim or controversy arising out of or relating to the Company’s obligations to pay S&S’s fees or expenses under Section 3 of this Agreement shall be settled exclusively by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a panel of three arbitrators The arbitrators shall each have at least ten years of direct experience with the investment banking and securities industries The arbitration of any such claim or controversy shall take place in Richmond,


Mr. Jonathan H. Mullins

October 29, 2010

Page 5 of 7

 

Virginia Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. All other claims or controversies arising out of or relating to this Agreement shall be resolved pursuant to an action brought exclusively in the federal or state courts sitting in Richmond, Virginia The parties irrevocably submit to the jurisdiction of such courts and waive all objections to such venue. S&S and the Company (on behalf of itself and, to the extent permitted by law, on behalf of its security holders) each waives any right to trial by jury in any proceeding with respect to S&S’s engagement. Notwithstanding the second sentence of this paragraph, the parties may at any time apply to a court for injunctive relief

(d) This Agreement may be executed in counterparts, each of which shall be deemed an original, all of which shall constitute one and the same instrument. Either party’s execution and delivery of this Agreement may be evidenced by either physical delivery or facsimile communication of such executed Agreement or executed counterpart to the other party

(e) This Agreement may not be amended, nor any provision hereof waived, except in a writing signed by the Company and S&S. Neither party may assign this Agreement without the prior written consent of the other party. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior discussions, communications, agreements and understandings, if any, whether oral or written, relating to its subject matter. If any provision of this Agreement shall be determined to be invalid or unenforceable in any respect, such determination shall not affect such provision in any other respect or any other provision of this Agreement, which shall remain in full force and effect

If the foregoing meets with your approval, please sign both copies of this Agreement and return one fully-executed version to S&S

 

Very truly yours,
Scott & Stringfellow, LLC

LOGO

By.   G. Jacob Savage, III
Title   Senior Managing Director

 

Agreed as of the date first written above:
New Peoples Bankshares, Inc
By.  

LOGO

Title.  

President & CEO

  Its Authorized Officer


ANNEX A

In connection with S&S’s engagement to advise and to assist the Company pursuant to the letter agreement, dated October 29, 2010, to which this Annex A is attached, the Company agrees that the Company shall indemnify and hold harmless S&S and each of its affiliates, and their respective officers, directors, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934), employees, affiliates, agents, counsel and other advisors (hereinafter collectively referred to as an “Indemnified Party”), to the full extent allowed by law or equity, from and against any and all judgments, losses, claims (whether or not valid), damages, costs, fees, expenses or liabilities, joint or several, to which an Indemnified Party may become subject, (i) related to or arising out of any untrue statement or alleged untrue statement of a material fact contained in offering documentation distributed in connection with the Offering, including documents described in or incorporated by reference, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in older to make the statements therein, in light of the circumstances under which they were made, not misleading, (n) related to or arising out of, in whole or in part, any inaccuracy in the representations or warranties of the Company contained in the [subscription agreements, placement agreement or registration rights agreement] anticipated to be entered into in connection with the Offering contemplated hereby, or any failure of the Company to perform its obligations thereunder; or (iii) related to or arising out of S&S’s engagement or performance under the Agreement, the transactions contemplated thereby, the services rendered by S&S under the Agreement, or any actual or threatened claim, litigation, investigation, proceeding or action in any court or before any regulatory, administrative or other body relating to any of the foregoing (hereinafter referred to collectively as a “Claim”), and shall, upon request, reimburse an Indemnified Party for all reasonable legal and other costs, fees and expenses as they are incurred in connection with investigating, preparing or defending a Claim, whether or not such Indemnified Party is ever made party to any Legal proceedings or such Claim arose before or after the date hereof; provided , however, that no such indemnification shall be required to be paid to an Indemnified Party with respect to a Claim (x) to the extent the Claim arises out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with the written instructions of S&S or (y) that is finally determined by a court of competent jurisdiction (after exhaustion of all appeals) to have resulted primarily and proximately from the gross negligence, bad faith or willful misconduct of such Indemnified Party.

If the foregoing indemnity is unavailable or insufficient for any reason to hold any Indemnified Party harmless, then the Company shall contribute to any amounts paid or payable by an Indemnified Party in such proportion as appropriately reflects the relative benefits received by such Indemnified Party and the Company in connection with the matters to which the Claim relates If an allocation solely on the basis of benefits is judicially determined to be impermissible, then the Company shall contribute in such proportion as appropriately reflects the relative benefits and relative fault of the Company and such Indemnified Party, as well as any other equitable considerations. In no event shall the Company contribute less than the amount necessary to ensure that the aggregate liability of S&S and any other Indemnified Party for contribution pursuant to this paragraph in connection with all Claims does not exceed the amount of fees actually received by S&S under the Agreement For purposes hereof, relative benefits to the Company and S&S in connection with the Agreement shall be deemed to be in the same respective proportions as the total gross proceeds from the Offering (before deducting expenses) received by the Company and the aggregate fees actually received by S&S under the Agreement bear to the aggregate offering price of the common stock sold in the Offering, and relative fault of each Indemnified Party and the Company shall be determined by reference to, among other things, whether any untrue or alleged untrue statements of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by S&S, whether the actions and omissions to act were by such Indemnified Party or the Company and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such action or omission.


All amounts due to an Indemnified Party hereunder shall be payable by the Company promptly upon request by such Indemnified Party. In addition, the Company shall pay all costs and expenses (including reasonable attorneys’ fees) incurred by an Indemnified Party to enforce the terms of this Annex A.

The Company agrees not to waive, release or settle any Claim (whether or not S&S or any other Indemnified Party is a formal party to such Claim) in respect of which indemnification may be sought hereunder without the prior written consent of S&S (which consent will not be unreasonably withheld), unless such waiver, release or settlement includes an unconditional release of S&S and each Indemnified Party from all liability arising out of such claim.

The provisions of this Annex A shall be in addition to any liability which the Company may otherwise have to S&S; shall not be limited by any rights that S&S or any other Indemnified Party may otherwise have; shall remain in full force and effect regardless of any expiration or termination of S&S’s engagement; and shall be binding upon any successors or assigns of S&S and the Company.

In addition, neither S&S nor any of its affiliates, or any of its or their respective officers, directors, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934), employees or agents shall have any liability to the Company or its security holders or creditors, or any person asserting claims on behalf of or in the right of the Company (whether direct or indirect, in contract, tort, for an act of negligence or otherwise) for any losses, fees, damages, liabilities, costs, expenses or equitable relief arising out of or relating to this Agreement or the services to be rendered hereunder, except for losses, fees, damages, liabilities, costs or expenses that arise out of or are based on any action of or failure to act by S&S and that are finally determined (by a court of competent jurisdiction and after exhausting all appeals) to have resulted primarily from the gross negligence, bad faith or willful misconduct of S&S.


 

LOGO

 

 

 

      Investment Banking Group
      901 East Byrd Street
      Suite 410
      Richmond, VA 23219
      (804) 782-8894 (Phone)
      (804) 649-0990 (Fax)

February 22, 2012

CONFIDENTIAL

Mr. Jonathan H. Mullins

Chief Executive Officer

New Peoples Bankshares, Inc.

67 Commerce Drive

P.O. Box 1810

Honaker, VA 24260

Dear Mr. Mullins:

Scott & Stringfellow, LLC (“S&S”) is pleased to set forth in this letter (the “Agreement”) the terms of the exclusive engagement by New Peoples Bankshares, Inc. and its subsidiary New Peoples Bank Inc. (the “Company”), of S&S to deliver a fairness opinion to the Board of Directors of the Company in connection with the potential offering of the Company’s common stock through a rights offering and public offering (collectively referred to as the “Offering”) as outlined in a separate engagement letter dated October 29, 2010.

 

  1. S&S’s Responsibilities

In connection with this engagement, S&S will provide the following services:

 

  (a) prepare and deliver to the Company’s Board of Directors an opinion (the “Fairness Opinion”) as to the fairness from a financial point of view to the shareholders of the Company the pricing of the contemplated Offering; and

 

  (b) provide an update on general bank and thrift capital markets conditions at the present time.

The scope of S&S’s engagement shall be limited to those matters expressly set forth in this Agreement. For the sake of clarity, the scope of S&S’s engagement shall not include giving tax, legal, regulatory, accountancy or other specialist or technical advice.

 

  2. The Company’s Responsibilities

(a) The Company will provide S&S with access to the directors, officers and key employees and any other corporate information of the Company as S&S may reasonably request, including all information (financial or otherwise), data, opinions, appraisals, valuations, other information and materials relating to the Company that is relevant to the Offering. The Company will ensure that all information concerning the Company provided to S&S by the Company and its directors, officers, employees, agents and advisors in any form will be accurate and complete in all material respects, and will not be misleading in any material respect. S&S may rely on such information without verification. S&S shall not be required to physically inspect any assets or to prepare or obtain any independent evaluation or appraisal of any of the assets or liabilities of the Company or to make any determination as to the solvency


Mr. Jonathan H. Mullins

February 22, 2012

Page 2 of 7

 

of any party. S&S shall be entitled to assume that any projections prepared by the Company have been reasonably prepared and reflect the best currently available estimates and judgments of the party preparing or providing such projections.

(b) The Company further acknowledges that it will ensure that all information concerning the Company to be provided to S&S, directly or indirectly, orally or in writing, by the Company and its directors, officers, employees, agents and advisors will be accurate and complete in all material respects, and will not be misleading in any material respect S&S will be entitled to rely on, and will be under no obligation to verify, the accuracy or completeness of such information.

(c) The Company agrees to notify S&S promptly in writing of any material change, actual or contemplated, relating to the Company’s business, operations, affairs, condition (financial or otherwise) or prospects, which would render untrue any statement of material fact made to S&S or material information furnished to S&S, or which would constitute an omission to state a material fact necessary to make any statement of material fact made to S&S or material information furnished to S&S not misleading in light of the circumstances in which it was made or furnished.

(d) The Company acknowledges that in carrying out S&S’s services hereunder, S&S will be relying on information prepared and supplied by the Company, its directors, officers, employees, agents and advisors Subject to the exercise of S&S’s professional judgment, S&S will be entitled to rely on, and will be under no obligation to verify, the accuracy or completeness of such information Subject to applicable securities law requirements, S&S will not be under any obligation to investigate any changes which may occur in such information subsequent to the date thereof, unless the Company specifically requests S&S to investigate such changes.

(e) In order to coordinate most effectively our efforts to effect an Offering, the Company will promptly inform S&S of any inquiry it may receive concerning the availability of any material portion of the securities or assets of the Company for purchase outside of the ordinary course of business. During the period of S&S’s engagement, neither the Company nor its representatives will initiate any discussions looking toward the sale of any portion of the securities or assets of Company outside the ordinary course of business without first consulting with S&S.

 

  3. S&S’s Fees

(a) As compensation for S&S’s services described in this Agreement, the Company agrees to pay to S&S a non-refundable “Fairness Opinion Fee” equal to $100,000. S&S requests that the Fairness Opinion Fee be paid in full immediately following the delivery of the Fairness Opinion to the Board of Directors, however, if the Company chooses, the Fairness Opinion Fee may be payable in the following installments- (1) $50,000 due and payable upon the signing of this Agreement, and (2) $50,000 due in full no later than 5 PM Eastern Standard Time on May 31, 2012. The Fairness Opinion Fee is payable to S&S in full by the aforementioned dates regardless of the status of the Offering at that time

(b) In addition, whether or not an Offering is consummated, the Company agrees to reimburse S&S, upon request, for its reasonable, accountable out-of-pocket expenses related to this engagement including S&S’s attorneys’ fees and any expenses and attorney fees for S&S services in the event S&S (or any of its directors, officers, agents or professional advisors) is required to testify or participate in any legal or other proceedings before any court or regulatory authority, in connection with its services hereunder, which out-of-pocket expenses shall not exceed $10,000 on a aggregate basis ( provided , however, that such expense cap in no way limits or impairs the provisions of Section 4 hereof). Subject to Section 4 hereof, the Company shall not be liable for any fees, costs or expenses incurred by S&S in connection with any arbitration or litigation between the Company and S&S regarding this Section 3 unless S&S is the substantially prevailing party therein.


Mr. Jonathan H. Mullins

February 22, 2012

Page 3 of 7

 

  4. Indemnity

The Company and S&S agree to the provisions relating to indemnity and liability set forth in Annex A

 

  5. Term of Agreement

This Agreement may be terminated by the Company or S&S at any time and without liability or further obligation to the Company or S&S (except for compensation earned and reimbursable expenses incurred to the date of termination) upon prior written notice to the other party Furthermore, the indemnity provisions of Section 4 of this Agreement and the waiver of the right to trial by jury provision and other provisions of Section 6(c) hereof will remain operative regardless of such termination.

 

  6. Other Matters

(a) S&S and the Company confirm their understanding and agreement that the Company has retained S&S hereunder as an independent contractor, and not as a fiduciary or agent, and solely for the Company’s benefit and not for the benefit of any third party, including the Company’s security holders and creditors The scope of S&S’s engagement shall be limited to those matters expressly set forth in this Agreement. For the sake of clarity, the scope of S&S’s engagement shall not include giving tax, legal, regulatory, accountancy or other specialist or technical advice.

(b) S&S is an affiliate of BB&T Corporation, which through its subsidiaries and affiliates provides full-service securities trading and brokerage services and other investment banking and financial advisory services. In the ordinary course of its trading and brokerage activities, one or more of S&S’s affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for its own account or for the account of customers, in the securities or options or other derivatives relating to the securities of the Company. S&S recognizes its responsibility for compliance with federal laws in connection with such activities. This Agreement shall not limit or preclude BB&T Corporation, S&S or any of their affiliates (a) from carrying on any business with, from providing banking or other financial services to, or from participating in any capacity (including as an equity investor, in any party whatsoever) including without limitation, any competitor, supplier or customer of the Company, or any other party which may have interests different from or adverse to the Company, or (b) from carrying on its business as currently conducted or as such business may be conducted in the future

(c) This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia, without giving effect to that state’s principles of conflict of law. Any claim or controversy arising out of or relating to the Company’s obligations to pay S&S’s fees or expenses under Section 3 of this Agreement shall be settled exclusively by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a panel of three arbitrators The arbitrators shall each have at least ten years of direct experience with the investment banking and securities industries The arbitration of any such claim or controversy shall take place in Richmond, Virginia. Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction thereof. All other claims or controversies arising out of or relating to this Agreement shall be resolved pursuant to an action brought exclusively in the federal or state courts sitting in Richmond, Virginia The parties irrevocably submit to the jurisdiction of such courts and waive all objections to such venue. S&S and the Company (on behalf of itself and, to the extent permitted by law, on behalf of its security holders) each waives any right to trial by jury in any proceeding with respect to S&S’s engagement Notwithstanding the second sentence of this paragraph, the parties may at any time apply to a court for injunctive relief.


Mr. Jonathan H. Mullins

February 22, 2012

Page 4 of 7

 

(d) This Agreement may be executed in counterparts, each of which shall be deemed an original; all of which shall constitute one and the same instrument Either party’s execution and delivery of this Agreement may be evidenced by either physical delivery or facsimile communication of such executed Agreement or executed counterpart to the other party

(e) This Agreement may not be amended, nor any provision hereof waived, except in a writing signed by the Company and S&S. Neither party may assign this Agreement without the prior written consent of the other party This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior discussions, communications, agreements and understandings, if any, whether oral or written, relating to its subject matter. If any provision of this Agreement shall be determined to be invalid or unenforceable in any respect, such determination shall not affect such provision in any other respect or any other provision of this Agreement, which shall remain in full force and effect.

If the foregoing meets with your approval, please sign both copies of this Agreement and return one fully-executed version to S&S.

 

Very truly yours,
Scott & Stringfellow, LLC
By:   David M Wojdyla
Title:   Vice President

 

Agreed as of the date first written above.
New Peoples Bankshares, Inc.
By:  

LOGO

Title:  

President & CEO

      Its Authorized Officer


ANNEX A

In connection with S&S’s engagement to advise and to assist the Company pursuant to the letter agreement, dated February 22, 2012, to which this Annex A is attached, the Company agrees that the Company shall indemnify and hold harmless S&S and each of its affiliates, and their respective officers, directors, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20(a) of the Securities Exchange Act of 1934), employees, affiliates, agents, counsel and other advisors (hereinafter collectively referred to as an “Indemnified Party”), to the full extent allowed by law or equity, from and against any and all judgments, losses, claims (whether or not valid), damages, costs, fees, expenses or liabilities, joint or several, to which an Indemnified Party may become subject, (i) related to or arising out of any untrue statement or alleged untrue statement of a material fact contained in offering documentation distributed in connection with the Offering, including documents described in or incorporated by reference, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) related to or arising out of, in whole or in part, any inaccuracy in the representations or warranties of the Company contained in the [subscription agreements, placement agreement or registration rights agreement] anticipated to be entered into in connection with the Offering contemplated hereby, or any failure of the Company to perform its obligations thereunder, or (iii) related to or arising out of S&S’s engagement or performance under the Agreement, the transactions contemplated thereby, the services rendered by S&S under the Agreement, or any actual or threatened claim, litigation, investigation, proceeding or action in any court or before any regulatory, administrative or other body relating to any of the foregoing (hereinafter referred to collectively as a “Claim”), and shall, upon request, reimburse an Indemnified Party for all reasonable legal and other costs, fees and expenses as they are incurred in connection with investigating, preparing or defending a Claim, whether or not such Indemnified Party is ever made party to any legal proceedings or such Claim arose before or after the date hereof; provided , however, that no such indemnification shall be required to be paid to an Indemnified Party with respect to a Claim (x) to the extent the Claim arises out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with the written instructions of S&S or (y) that is finally determined by a court of competent jurisdiction (after exhaustion of all appeals) to have resulted primarily and proximately from the gross negligence, bad faith or willful misconduct of such Indemnified Party.

If the foregoing indemnity is unavailable or insufficient for any reason to hold any Indemnified Party harmless, then the Company shall contribute to any amounts paid or payable by an Indemnified Party in such proportion as appropriately reflects the relative benefits received by such Indemnified Party and the Company in connection with the matters to which the Claim relates. If an allocation solely on the basis of benefits is judicially determined to be impermissible, then the Company shall contribute in such proportion as appropriately reflects the relative benefits and relative fault of the Company and such Indemnified Party, as well as any other equitable considerations. In no event shall the Company contribute less than the amount necessary to ensure that the aggregate liability of S&S and any other Indemnified Party for contribution pursuant to this paragraph in connection with all Claims does not exceed the amount of fees actually received by S&S under the Agreement For purposes hereof, relative benefits to the Company and S&S in connection with the Agreement shall be deemed to be in the same respective proportions as the total gross proceeds from the Offering (before deducting expenses) received by the Company and the aggregate fees actually received by S&S under the Agreement bear to the aggregate offering price of the common stock sold in the Offering, and relative fault of each Indemnified Party and the Company shall be determined by reference to, among other things, whether any untrue or alleged untrue statements of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by S&S, whether the actions and omissions to act were by such Indemnified Party or the Company and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such action or omission.


All amounts due to an Indemnified Party hereunder shall be payable by the Company promptly upon request by such Indemnified Party. In addition, the Company shall pay all costs and expenses (including reasonable attorneys’ fees) incurred by an Indemnified Party to enforce the terms of this Annex A.

The Company agrees not to waive, release or settle any Claim (whether or not S&S or any other Indemnified Party is a formal party to such Claim) in respect of which indemnification may be sought hereunder without the prior written consent of S&S (which consent will not be unreasonably withheld), unless such waiver, release or settlement includes an unconditional release of S&S and each Indemnified Party from all liability arising out of such claim.

The provisions of this Annex A shall be in addition to any liability which the Company may otherwise have to S&S; shall not be limited by any rights that S&S or any other Indemnified Party may otherwise have; shall remain in full force and effect regardless of any expiration or termination of S&S’s engagement; and shall be binding upon any successors or assigns of S&S and the Company.

In addition, neither S&S nor any of its affiliates, or any of its or their respective officers, directors, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934), employees or agents shall have any liability to the Company or its security holders or creditors, or any person asserting claims on behalf of or in the right of the Company (whether direct or indirect, in contract, tort, for an act of negligence or otherwise) for any losses, fees, damages, liabilities, costs, expenses or equitable relief arising out of or relating to this Agreement or the services to be rendered hereunder, except for losses, fees, damages, liabilities, costs or expenses that arise out of or are based on any action of or failure to act by S&S and that are finally determined (by a court of competent jurisdiction and after exhausting all appeals) to have resulted primarily from the gross negligence, bad faith or willful misconduct of S&S

Exhibit 31.1

CERTIFICATIONS

I, Jonathan H. Mullins, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2012 of New Peoples Bankshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2012    

/s/ JONATHAN H. MULLINS

    Jonathan H. Mullins
    President & Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, C. Todd Asbury, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2012 of New Peoples Bankshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2012    

/s/ C. TODD ASBURY

    C. Todd Asbury
    Executive Vice President & Chief Financial Officer

Exhibit 32

CERTIFICATION OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

The undersigned, as the Chief Executive Officer and Chief Financial Officer, respectively, of New Peoples Bankshares, Inc., certify that, to the best of their knowledge and belief, the Quarterly Report on Form 10-Q for the period ended June 30, 2012 which accompanies this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of New Peoples Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

 

Date: August 14, 2012    

/s/ JONATHAN H. MULLINS

    Jonathan H. Mullins
    President & Chief Executive Officer
Date: August 14, 2012    

/s/ C. TODD ASBURY

    C. Todd Asbury
    Executive Vice President & Chief Financial Officer