10-K 1 f2snpbs10k041320.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2019

 

or

 

[ ] 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   24260
Honaker, VA    
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
  None  

 

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

Common Stock - $2 Par Value

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [ X ] No [ ]

 

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

 

 

Large accelerated filer   [ ]     Accelerated filer   [ ]
Non-accelerated filer   [X]   Smaller reporting company   [X]
          Emerging growth company   [ ]

 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]

 

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

 

The aggregate market value of the common stock held by non-affiliates, based on the last reported sales price of $1.95 per share on the last business day of the second quarter of 2019, was $20,326,751.

 

The number of shares outstanding of the registrant’s common stock was 23,922,086 as of March 27, 2020.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None

 
 

 

TABLE OF CONTENTS

 

TABLE OF CONTENTS

PART I     Page
Item 1.  Business   4 
         
Item 1A.  Risk Factors   14 
         
Item 1B.  Unresolved Staff Comments   14 
         
Item 2.  Properties   14 
         
Item 3.  Legal Proceedings   15 
         
Item 4.  Mine Safety Disclosures   15 
         
PART II        
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   15 
         
         
Item 6.  Selected Financial Data   15 
         
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   15 
         
         
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk   34 
         
Item 8.  Financial Statements and Supplementary Data   35 
         
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   70 
         
         
Item 9A.  Controls and Procedures   70 
         
Item 9B.  Other Information   70 
         

PART III        
Item 10.  Directors, Executive Officers and Corporate Governance   71 
         
Item 11.  Executive Compensation   75 
         
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   77 
         
         
Item 13.  Certain Relationships, Related Transactions and Director Independence   78 
         
Item 14.  Principal Accounting Fees and Services   78 
         
PART IV        
Item 15.  Exhibits, Financial Statement Schedules   80 
         
Item 16.  Form 10-K Summary    80 
         
SIGNATURES      81 

 

 
 

PART I

 

Item 1.Business

 

General

 

New Peoples Bankshares, Inc. (New Peoples, the Company, we, us or our) is a Virginia financial holding company headquartered in Honaker, Virginia. Our business is conducted primarily through New Peoples Bank, Inc., a Virginia banking corporation (the Bank). The Bank has a division doing business as New Peoples Financial Services which offers investment services through its broker-dealer relationship with Infinex Investments, Inc. NPB Insurance Services, Inc. (NPB Insurance) is a subsidiary of the Bank and generates revenue through the referral of insurance services.

 

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

 

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

 

Our History

 

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

 

In June 2003, New Peoples formed two new wholly-owned subsidiaries, NPB Financial Services, Inc. (renamed NPB Insurance Services, Inc. in June 2012) and NPB Web Services, Inc, an inactive web design and hosting company.

 

The Bank, through its division New Peoples Financial Services, offers fixed and variable annuities, fee based asset management and other investment products through a broker/dealer relationship with Infinex Investments, Inc.

 

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

 

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

 

On June 7, 2017, NPB Insurance Services, Inc. purchased a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.

 

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Branch Locations

 

After a period of significant branch expansion between 2000 and 2008, we have consolidated some of our branch operations to improve efficiency. Currently, in addition to our headquarters in Honaker, Virginia we have 18 full service branches located in three states: Virginia - Abingdon, Big Stone Gap, Bluefield, Bristol, Castlewood, Chilhowie, Clintwood, Gate City, Grundy, Haysi, Lebanon, Pounding Mill, Tazewell, Weber City and Wise; West Virginia - Princeton (2); and Tennessee - Kingsport. In 2019, we purchased property in Bristol, Virginia and have received regulatory approval to operate a full service branch at this site. We expect to open in the third quarter of 2020, after renovations to the site are completed. We have 1 limited services branch in Pound, Virginia. We also have a loan production office in Kingsport, Tennessee.

 

In the first quarter of 2020, we purchased an office building in Kingsport, TN that had recently been vacated by another financial institution. Pending regulatory approval, we plan to commence operations of a full service branch at this location during the second quarter. We also intend to relocate the loan production office operations to the newly acquired location at the end of the current lease.

 

Our Market Areas

 

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

 

Accessibility to Interstates I-77, I-81, I-26, I-64 and I-75, as well as major state and U.S. highways including US 19, US 23, US 58, US 460 and US 421, make the area an ideal location for businesses to serve markets in the Mid-Atlantic, Southeast and Midwest. The area is strategically located midway between Atlanta-Pittsburgh, Charlotte-Cincinnati, and Richmond-Louisville, and is within a day’s drive of more than half of the U.S. population. A regional airport located in Bristol, Tennessee serves the area with commercial flights to and from major cities in the United States. Commercial rail service providers include CSX Transportation and Norfolk Southern Railways.

 

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

 

Internet Site

 

We have our internet banking site at www.newpeoples.bank. The site includes a customer service area that contains branch and Interactive Teller Machine (ITM) locations, product descriptions and current interest rates offered on deposit accounts. Customers with internet access can apply for loans, open deposit accounts online, access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.

 

Available Information

 

We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC. Our SEC filings are filed electronically and are available to the public online at the SEC’s web site at www.sec.gov. We also provide a link to our filings on the SEC website, free of charge, through our internet website www.npbankshares.com under "Investor Relations." We also make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on From 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information on the websites of the Company and the Bank does constitute part of, and is not incorporated into, this report or any other filings the Company makes with the SEC.

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Banking Services

 

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

 

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

 

Our lending activities are subject to a variety of lending limits imposed by state law. While differing limits may apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), the Bank generally is subject to a loans-to-one-borrower limit of an amount equal to 15% of its capital and surplus plus the allowance for loan losses. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit.

 

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

 

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

             
   December 31,
   2019  2018  2017  2016  2015
Commercial, financial and agricultural   14.45%   15.20%   13.35%   11.75%   10.76%
Real estate – construction   5.53%   6.42%   5.80%   5.50%   3.33%
Real estate – commercial   30.30%   25.74%   24.89%   22.05%   22.34%
Real estate – residential   45.61%   48.15%   51.59%   55.97%   58.00%
Installment loans to individuals   4.11%   4.37%   4.37%   4.73%   5.57%
Total   100.00%   100.00%   100.00%   100.00%   100.00%

 

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

 

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

 

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

 

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

 6 

 

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

 

Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral.

 

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

 

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

 

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

 

Other Bank Services. Other bank services include safe deposit boxes, cashier’s checks, certain cash management services, direct deposit of payroll and social security checks and automatic drafts for various accounts. We offer ITM and debit card services that can be used by our customers throughout our service area and other regions. We also offer consumer and commercial VISA credit card services. Electronic banking services include debit cards, internet banking, telephone banking, mobile banking, remote deposit capture; merchant transaction processing and wire transfers.

 

We do not presently anticipate obtaining trust powers, but we are able to provide similar services through our affiliation with Infinex Investments, Inc. Additionally, we have initiated programs of differentiator presentations focusing on such issues as financial literacy, elder abuse and planning for special needs individuals. We believe that these types of programs assist our local communities and highlight the skills of our financial service providers.

 

Competition

 

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

 7 

 

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

 

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

 

According to a market share report prepared by the Federal Deposit Insurance Corporation (the FDIC), as of June 30, 2019, the most recent date for which market share information is available, the Bank’s deposits as a percentage of total deposits in its major market areas were as follows:

 

County or City     % of Market
Scott County, VA     37.35%
Dickenson County, VA     28.33%
Russell County, VA     24.25%
Wise County, VA     11.03%
Tazewell County, VA     8.97%
Mercer County, WV     8.86%
Buchanan County, VA     8.75%
Smyth County, VA     4.33%
Washington County, VA     3.73%
City of Bristol, VA     2.18%
City of Kingsport, TN     1.60%

 

Employees

 

As of December 31, 2019, we had 232 total employees, of which 222 were full-time employees. None of our employees is covered by a collective bargaining agreement, and we consider relations with employees to be excellent.

 

Supervision and Regulation

 

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

 

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

 

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

 

•       banking, managing or controlling banks;

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•       furnishing services to or performing services for its subsidiaries; and

 

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

 

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

 

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

 

•       acquiring substantially all the assets of any bank;

 

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

 

•       merging or consolidating with another bank holding company.

 

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

 

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

 

Financial Holding Company. As of March 4, 2016 the Company elected to become qualified as a financial holding company (FHC). The Gramm-Leach-Bliley Act (GLBA) created this category of bank holding companies. FHC’s may directly or indirectly through subsidiaries engage in financial activities and activities “incidental” or “complementary” to financial activities. Generally, a FHC need not give prior notice of such activities, but must notify the Federal Reserve within 30 days after the event.

 

The BHCA provides a long list of “financial” activities that may be engaged in by FHCs such as underwriting, brokering or selling insurance; providing financial or investment advice; underwriting; dealing in or making a market in securities.

 

There are other potential “financial” activities in which the Federal Reserve is permitted to designate as permitted financial or incidental to financial activities.

 

We do not currently undertake activities specifically permitted to us as a FHC that are not otherwise permissible for bank holding companies not qualified as FHCs.

 

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

 

Payment of Dividends. New Peoples is a separate legal entity that derives the majority of its revenues from dividends paid to it by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

 

Capital Adequacy. The federal banking regulators have issued substantially similar capital requirements applicable to all banks and bank holding companies. In addition, those regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

 9 

 

The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015, and does not report consolidated regulatory capital. With respect to the Bank, the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act (FDIA) were revised, effective as of January 1, 2015, to incorporate a new Common Equity Tier 1 (CET1) risk-based capital measure. The risk-based capital and leverage capital requirements under the final prompt corrective action regulations are set forth in the following table:

 

  Total Risk   Tier 1 Risk   CET1 Risk    
  Based Capital   Based Capital   Based Capital   Leverage
  Ratio   Ratio   Ratio   Ratio
Well Capitalized ≥ 10%   ≥ 8%   ≥ 6.5%   ≥ 5%
Adequately Capitalized ≥ 8%   ≥ 6%   ≥ 4.5%   ≥ 4%
Undercapitalized ≥ 8%   ≥ 6%   ≥ 4.5%   ≥ 4%
Significantly Undercapitalized ≥ 6%   ≥ 4%   ≥ 3%   ≥ 3%
Critically Undercapitalized Tangible equity to total assets ≤ 2%

 

The FDIA requires the federal banking regulators to take “prompt corrective action” if a depository institution does not meet minimum capital requirements as set forth above. Generally, a receiver or conservator for a bank that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for a bank required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by a regulator, or (ii) the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the bank is notified that it has maintained adequately capitalized status for specified time periods. Additional measures with respect to undercapitalized institutions include a prohibition on capital distributions, growth limits and restrictions on activities.

 

The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The final rules established minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The final provisions for banks with $250 billion or less in total assets, such as the Bank, are set forth in the following table:

 

Minimum Leverage Ratio   4.00%
Minimum CET1 Risk Based Capital Ratio   4.50%
Capital Conservation Buffer (1)   2.50%
Minimum Tier CET1 Risk Based Capital Ratio with Capital Conservation Buffer   7.00%
Minimum Tier 1 Risk Based Capital Ratio   6.00%
Minimum Tier 1 Risk Based Capital Ratio with Capital Conservation Buffer   8.50%
Minimum Total Risk Based Capital Ratio   8.00%
Minimum Total Risk Based Capital Ratio with Capital Conservation Buffer   10.50%

 

(1)The capital conservation buffer must be maintained in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers.

 

The final rules include comprehensive guidance with respect to the measurement of risk-weighted assets.  For residential mortgages, Basel III retains the risk-weights contained in the prior capital rules, which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures.  The final rule increased the risk-weights associated with certain on-balance sheet assets, such as high volatility commercial real estate loans, and loans that are more than 90 days past due or in nonaccrual status. Capital requirements also increased for certain off-balance sheet exposures including, for example, loan commitments with an original maturity of one year or less.

 

Under the final rules, certain banking organizations, including the Company and the Bank, were permitted to make a one-time election to continue the prior treatment of excluding from regulatory capital most accumulated other comprehensive income (AOCI) components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit post-retirement plans.  Institutions that elected to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities.  The Company and the Bank elected to exclude AOCI components from regulatory capital under Basel III.

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Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements as set forth above.

 

On September 17, 2019, the federal banking regulators jointly issued a final rule required by the Economic Growth, Regulatory Reform and Consumer Protection Act (EGRRCPA) that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets, such as New Peoples and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or CBLR). Under the rule, which became effective on January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. These CBLR rules were modified in response to the novel coronavirus (COVID-19) pandemic. See “— Coronavirus Aid, Relief, and Economic Security Act” below. We are evaluating whether to opt in to the CBLR framework.

 

For further detail on capital and capital ratios see discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” sections, “Capital Resources” and “Liquidity,” contained in Item 7, and in Note 21, “Capital,” to the accompanying Consolidated Financial Statements contained in Item 8.

 

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

 

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

 

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

 

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

 

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

 

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

 

Community Reinvestment Act. Under the Community Reinvestment Act, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. The Community Reinvestment Act emphasizes the delivery of bank products and services through branch locations in a bank’s market areas and requires banks to keep data reflecting their efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA (see below) may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “Satisfactory” rating in its latest Community Reinvestment Act examination. The Bank received a rating of “Satisfactory” at its last Community Reinvestment Act performance evaluation, as of July 22, 2019.

 11 

 

 

Gramm-Leach-Bliley Act of 1999. The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. For example, the GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become FHCs, which can engage in a broad range of financial services as described above. In order to become a FHC, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. On March 4, 2016 the Federal Reserve Bank of Richmond approved New Peoples’ election to become a FHC.

 

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

 

Anti-Money Laundering Legislation. New Peoples is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require New Peoples to take steps to prevent the use of New Peoples for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

 

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

 

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

 

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

 

Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Deposit insurance Fund, as administered by the FDIC, to the maximum amount permitted by law, which is $250,000 per depositor. The FDIC uses a “financial ratios method” based on “CAMELS” composite ratings to determine deposit insurance assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk (CAMELS). CAMELS composite ratings set a maximum assessment for CAMELS 1 and 2 rated banks, and set minimum assessments for lower rated institutions.

 

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

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The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. The EGRRCPA modified a number of these requirements, including, for smaller institutions (under $10 billion in total assets) that qualify, a safe harbor for compliance with the “ability to pay” requirements for consumer mortgage loans. The CFPB has implemented mortgage lending regulations to carry out its mandate. In addition, the Federal Reserve has issued rules limiting the fees charged to merchants by credit card companies for debit card transactions. The result of these rules is to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

 

The Dodd-Frank Act has had, and may in the future have, a material impact on New Peoples’ operations, particularly through increased compliance costs resulting from new and possible future consumer and fair lending regulations. The future changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent regulatory requirements or otherwise adversely affect the business and financial condition of New Peoples and the Bank. These changes may also require New Peoples to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.

 

The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018. The EGRRCPA, which became effective in May 2018, amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators. Among these amendments are provisions exempting insured depository institutions (and their parent companies) with less than $10 billion in consolidated assets and meeting certain other asset and liabilities trading tests from the Volker Rule, which prohibits banks from conducting certain investment activities with their own accounts. The EGRRCPA required the regulators to promulgate rules establishing the new CBLR, as described above. The Act increased the asset threshold from $1 billion to $3 billion for financial institutions to qualify for a less burdensome 18 month on site examination schedule. The EGRRCPA made numerous other changes in regulatory requirements based on the size and complexity of financial institutions, particularly benefiting smaller institutions like the Company.

 

Coronavirus Aid, Relief, and Economic Security Act In response to the COVID-19 pandemic, President Trump signed into law the CARES Act on March 27, 2020. Among other things, the CARES Act included the following provisions impacting financial institutions:

 

·Community Bank Leverage Ratio. The CARES Act directs federal bank regulators to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulators issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

 

·Temporary Troubled Debt Restructurings (TDRs) Relief. The CARES Act allows banks to elect to suspend requirements under accounting principles generally accepted in the United States of America (GAAP) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. Federal banking regulators are required to defer to the determination of the banks making such suspension.

 

·Small Business Administration (SBA) Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, $349 billion was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. The loans are provided through participating financial institutions that process loan applications and service the loans.
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Other Laws. Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs to financial institutions and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.

 

Future Regulatory Uncertainty. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated notwithstanding the regulatory relief that has been recently adopted.

 

Subsequent Events

 

We have considered subsequent events through the date of the financial statements in this Form 10-K. Refer to Item 8 “Financial Statements and Supplementary Data” Note 25 of the consolidated financial statements.

 

Item 1A. Risk Factors

 

Not applicable.   

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

At December 31, 2019, the Company's net investment in premises and equipment in service was $21.2 million. Construction in progress related to our Bristol, Virginia location has accumulated to $1.0 million at December 31, 2019. Our main office and operations center are located in Honaker, Virginia. This location contains a full service branch, and a separate administration and operations center.

 

The Bank owns 14 of its full service branches, including its headquarters office, and its one limited service branch. The locations of these branches are described in Item 1. In 2017, the Bank sold its Abingdon, Bristol, Gate City and Castlewood, Virginia properties and in connection with the sale of these four properties, the Bank entered into commercial lease agreements for the properties, which allowed the Bank to continue to service customers from these locations. During the third quarter of 2019, the Bank sold its Lebanon, Virginia property. In connection with the sale, the Bank entered into a commercial lease agreement which allows the Bank to continue to service customers from this location. For additional discussion of these leases see Item 8 “Financial Statements and Supplementary Data” Note 17, Leasing Activities, in Notes to the Consolidated Financial Statements. Aside from the retail branch offices, we own a building in Bristol, Virginia that serves as our call center and ITM network operations site. We also own a location in Bristol, Virginia that is being renovated and will open as a full service branch in 2020.

 

The Bank leases office space in Kingsport, Tennessee for use as a loan production office, which opened in January 2018. For additional discussion of this lease see Note 17, Leasing Activities, in Notes to the Consolidated Financial Statements.

 

In May 2018, a site in Princeton, West Virginia that had been used as an administrative office opened as a full service branch, as our second customer service location in this market.

 

During 2018, we limited activity at the Jonesborough, Tennessee loan production office and in 2019 it was closed and the ITM at this site was relocated. The property is currently being marketed for sale.

 

The Bank owns a location in Dungannon, Virginia that is now currently being leased, but was formerly used as a branch until its closure during 2010. A closed office in Bland, Virginia was sold in May 2018. Three other closed branches (Bluewell, West Virginia, Bristol, and Jonesville, Virginia) that are vacant may be used for future banking offices again. A fourth former branch office in Norton, Virginia was transferred to other real estate owned in 2019 and is being marketed for sale.

 

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

 

Item 3. Legal Proceedings

 

In the normal course of operations, we may become a party to legal proceedings. As disclosed in Item 8 “Financial Statements and Supplementary Data” Note 20, 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, operations or liquidity of the Company.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

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

 

(a)       Market Information

 

Computershare Investor Services is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the Over the Counter Bulletin Board under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically in small volumes. Over-the-Counter market quotations reflect inter-dealer prices without retail mark up, mark down or commissions and may not necessarily represent actual transactions.

 

The most recent sales price of which management is aware was $1.53 per share on March 27, 2020.

 

(b)       Holders

 

On March 27, 2020, there were approximately 4,358 shareholders of record.

 

(c)       Dividends

 

In order to preserve capital we have not paid cash dividends to our shareholders. Any declaration of dividends in the future will depend on our earnings, capital requirements, growth strategies, and compliance with regulatory mandates principally at the Bank level since the Company’s primary source of income is dividends which it would receive from the Bank. We are subject to certain dividend restrictions and capital requirements imposed by the Federal Reserve Bank as well as Virginia banking statutes and regulations. We do not anticipate paying a dividend on our common stock in the foreseeable future as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable. See Notes 16 Dividend Limitation on Subsidiary Bank and Note 21 Capital in Item 8 “Financial Statements and Supplementary Data” for further discussion of dividend limitations and capital requirements.

 

Item 6. Selected Financial Data

 

Not applicable.

 

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

 

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Caution About Forward Looking Statements

 

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

·the success or failure of our efforts to implement our business plan;
·any required increase in our regulatory capital ratios;
·satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;
·deterioration of asset quality;
·changes in the level of our nonperforming assets and charge-offs;
·fluctuations of real estate values in our markets;
·our ability to attract and retain talent;
·demographical changes in our markets which negatively impact the local economy;
·the uncertain outcome of enacted legislation to stabilize the United States financial system;
·the successful management of interest rate risk;
·the successful management of liquidity;
·changes in general economic and business conditions in our market area and the United States in general;
·credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;
·competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources;
·demand, development and acceptance of new products and services we have offered or may offer;
·the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;
·the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the recent novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;
·technology utilized by us;
·our ability to successfully manage cyber security;
·our reliance on third-party vendors and correspondent banks;
·changes in generally accepted accounting principles;
·changes in governmental regulations, tax rates and similar matters; and,
·other risks which may be described in our future filings with the SEC.

 

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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General

 

The following commentary discusses major components of our business and presents an overview of our consolidated financial position at December 31, 2019 and 2018 as well as results of operations for the years ended December 31, 2019 and 2018. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.

 

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

 

Critical Accounting Policies

 

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset and any related valuation allowance.

 

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

 

Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At December 31, 2019 and 2018, the Company had no valuation allowance on its net deferred tax assets.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Income Taxes and Deferred Tax Assets” in this discussion.

 

The Company early adopted Accounting Standards Update (ASU) No. 2016-02 Leases (Topic 842). This ASU revised certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions.

 

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

 

Cyber Security

 

The Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Company has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Company’s results of operations or financial condition.

 

Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cyber security and the continued development and enhancement of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack, damage or unauthorized access, remain a priority for the Company. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.

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In 2018, the SEC issued guidelines governing the manner in which public companies report cyber security breaches to investors. The federal bank regulatory agencies and state laws govern the manner in which banks report cyber security breaches to affected customers.

 

Recent Events

 

Since December 31, 2019 COVID-19 has adversely affected, and will continue to adversely affect economic activity globally, nationally and locally. Following the global COVID-19 outbreak in December 2019 and domestically in January 2020, market interest rates have declined significantly. Since the beginning of March 2020, the Federal Open Market Committee reduced the target federal funds rate twice by a total of 150 basis points (“bps”). As a result of these actions the target federal funds rate now stands at 0.00% - .25% and the prime interest rate stands at 3.25%.

 

As the pandemic spread throughout the nation, state and local governments implemented recommendations or orders limiting travel outside the home to work or obtaining essential services, and mandating social distance when out in public. This has had, and will continue to have, a significant adverse impact on the economy as certain industries have been impaired or virtually brought to a standstill.

 

Financial services were designated as essential services, and we have continued to meet the needs of our customers. To lessen the risk to our employees and customers, we have limited access to our branch lobbies and are providing most essential services through our drive-thru facilities and ITM network. Additionally, we have made personal protective items available to our employees, implemented social distancing protocols and enhanced cleaning procedures at our branch and support sites. Several of our support departments have implemented spit staffing to allow personnel to rotate from working onsite and working from home.

 

In response to the economic and social impact of the pandemic, legislation has been passed providing economic support to citizens and businesses impacted by the resulting economic downturn. Financial institutions, including the Company, are participating in programs to provide short-term financing to businesses to support employee retention, and offering payment deferrals to borrowers impacted by business declines, permanent or temporary loss of employment or other factors.

 

At this time we cannot state how the economic downturn will affect the financial position, operations or liquidity of the Company. Throughout the following discussion, we have attempted to input additional commentary addressing the uncertainty of the current economic conditions.

 

Overview

 

At December 31, 2019, total assets were $706.4 million, total loans were $562.5 million, and total deposits were $621.5 million. The Company‘s consolidated net income for the year ended December 31, 2019 was $2.1 million, or basic income per share of $0.09 as compared to a net income of $919 thousand, or basic income per share of $0.04, for the year ended December 31, 2018. This is an increase of $1.1 million, or $0.05 per share. This increase was driven by an increase in net interest income of $769 thousand, increased non-interest income of $1.0 million, and decreased non-interest expense of $1.5 million, but partially offset by an increase in provision for loan losses of $1.8 million. The $769 thousand increase in net interest income represents a 3.18% increase for 2019 over 2018, and is due primarily to the $2.2 million increase in interest and fees on loans, half of which is a result of growth in commercial loans secured by real estate during 2019. The $1.7 million increase in interest expense is primarily due to higher rates paid on time deposits. The Company’s key performance indicators are as follows:

 

   December 31,
   2019  2018  2017
          
Return on average assets   0.29%   0.14%   0.47%
Return on average equity   3.89%   1.83%   6.30%
Average equity to average assets ratio   7.46%   7.43%   7.52%

 

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Highlights from the year 2019 include:

 

·Net income improved 124.0% to $2.1 million, or $0.09 per share, in 2019 compared to $919 thousand, or $0.04 per share, in 2018;
·Sale and leaseback transaction in 2019 resulted in a gain of $803 thousand;
·Loan balances increased $15.4 million, or 2.8%, to $562.5 million;
·Provision for loan losses was $2.1 million for 2019 as compared to $252 thousand for 2018;
·Nonperforming assets decreased $3.8 million, or 30.5%, to $8.5 million at year-end 2019;
·Deposits increased $25.5 million, or 4.3%, to $621.5 million;
·Net interest margin was 3.82%; and
·Book value per share grew $0.14 to $2.28 as of December 31, 2019.

 

Total assets increased $24.2 million in 2019, or 3.6%, from $682.1 million at December 31, 2018. Loans increased $15.4 million, or 2.8%, due to continued growth in the loan portfolio. We anticipate that total assets will continue to grow as our plan to conservatively and prudently grow the loan portfolio remains successful, as it was in 2018 and 2017. However, the effects of COVID-19 and its impact on the economy may cause traditional loan growth to decrease from prior years. Other Real Estate Owned (OREO) decreased $2.5 million, or 42.8%, in 2019 to $3.4 million at December 31, 2019 from $5.9 million at December 31, 2018. Bank owned life insurance grew $63 thousand during the year to $4.6 million at December 31, 2019.

 

On the liability side of the balance sheet, total deposits increased $25.5 million, or 4.3%, to $621.5 million, due mainly to growth in money market deposits of $18.8 million. We anticipate total deposits to increase as we continue to focus on future growth. Due to cash generated by the increase in deposits, we were able reduce Federal Home Loan Bank of Atlanta (FHLB) advances by $2.0 million to $5.0 million. Trust preferred securities remained unchanged at $16.5 million.

 

As a result of a sale and leaseback transaction in 2019, right-to-use assets – operating leases, along with similar corresponding lease liabilities totaled $5.8 million and $4.9 million, at year-end 2019 and 2018, respectively. Total equity was $54.6 million at December 31, 2019, an increase of $3.4 million, or 6.5%. The Bank’s capital ratios at December 31, 2019 as compared to December 31, 2018, respectively, were as follows: Tier 1 leverage ratio of 9.43% versus 9.59%; Tier 1 risk based capital ratio of 13.72% versus 13.29%; total risk based capital ratio of 14.83% versus 14.39%; and common equity Tier 1 capital ratio of 13.72% versus 13.29%. The Bank is considered well-capitalized under regulatory guidelines. As noted above, these capital measurements will no longer apply to the Bank if it elects to comply with the Community Bank Leverage Ratio discussed above.

 

Expenses related to OREO properties were $635 thousand in 2019 compared to $1.0 million in 2018. During 2019, we recorded writedowns on other real estate owned properties in the amount of $214 thousand compared to $542 thousand in 2018. During 2019, we had a net loss on the sale of OREO of $123 thousand compared to a net loss of $135 thousand in 2018.

 

Total loans increased $15.4 million in 2019, or 2.8%, to $562.5 million at December 31, 2019, as compared to $547.1 million at December 31, 2018. The main driver in this increase in total loans is our strategy to grow and diversify the loan portfolio. Over the past few years, we added several commercial lenders, mostly focused in the Tri-Cities market of Bristol, VA and TN, Kingsport, TN, and Johnson City, TN; and Princeton, WV. During 2019, we added another seasoned commercial lender to serve the Bristol and Abingdon markets. We continue to solicit loans from the loan production office in Kingsport, TN that opened in 2018. Prior to the recent economic events related to the COVID-19 pandemic, we expected the trend in total loan growth we have experienced in 2019 and 2018 to continue at least in the near term. However, loan growth in general is subject to economic conditions, customer demand, and competition in our markets.

 

Asset quality continued to improve during 2019, as OREO and nonaccrual loans both decreased. Nonperforming assets, which include nonaccrual loans, loans past due 90 days or greater still accruing interest and OREO decreased $3.8 million, or 30.5%, to $8.5 million at year-end 2019 from $12.3 million at year-end 2018. Total nonperforming assets represented 1.52% and 2.25% of total assets at December 31, 2019 and December 31, 2018, respectively. There were no loans past due 90 days or greater and still accruing interest at December 31, 2019 or 2018. The makeup of these assets is primarily related to residential real estate and commercial real estate. During the fourth quarter of 2019, the largest foreclosed property, with a recorded balance of $1.6 million, was sold. We continue undertaking extensive and aggressive measures to work out problem credits and liquidate foreclosed properties in an effort to accelerate a reduction of nonperforming assets. Our goal is to continue to reduce the nonperforming assets being mindful of the impact to earnings and capital; however, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

 19 

 

Our allowance for loan losses at December 31, 2019 was $5.4 million, or 0.95%, of total loans, as compared to $5.3 million, or 0.98% of total loans at December 31, 2018. Impaired loans decreased $2.4 million, or 30.1%, to $5.6 million, with an estimated allowance of $323 thousand for potential losses, at December 31, 2019; as compared to $8.0 million in impaired loans, with an estimated allowance of $318 thousand, at the end of 2018. A provision for loan losses of $2.1 million was recorded in 2019, up from $252 thousand in 2018. Net loans charged off in 2019 were $2.0 million, or 0.36% of average loans, compared to $1.1 million, or 0.21% of average loans, in 2018. The losses recorded in 2019, were primarily related to several commercial loans extended to borrowers who ceased operations during the year. Two of these relationships accounted for $1.5 million of the losses recorded. 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 adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.

 

Net Interest Income and Net Interest Margin

 

The Company’s primary source of income, net interest income, increased $769 thousand, or 3.2% from 2018 to 2019. The increase in net interest income is due primarily to the $2.2 million increase in interest income on loans during 2019, due to both increased loan volume and higher rates during 2019. We have been successful over the past two years in our strategy to grow the loan portfolio, and reduce reliance on residential mortgage loans by increasing the level of commercial and commercial real estate credits. We believe, going forward, new increased volume will outpace the monthly loan paydowns and maturities. Investment interest income decreased by $171 thousand, or 11.0%, in 2019 compared to 2018, due to the decrease in the investment portfolio. However, higher deposit balances drove increases in cash, increasing interest income from other banks by $426 thousand, to $805 thousand in 2019 compared to 2018.

 

The increase in interest income was partially offset by a $1.7 million, or 52.7%, increase in interest expense, which included a $1.1 million increase in interest expense on time deposits, generally due to competitive pressure and the higher general rate environment for the first seven months of 2019. The cost of deposits was also impacted by the carryover of two time deposit promotions from 2018. One related to the opening of a second branch in Princeton, WV, was offered in that local market, and another promotional CD offered across the entire footprint began in December 2018, and ran through the first quarter of 2019, in celebration of our 20th anniversary. Both of these efforts while mitigating the general decline in time deposits, also contributed to the overall increase in the cost of funds. Aside from the promotional time deposit products offered during the year, we also had occasion to match rates offered by competing financial institutions for various existing customers.

 

Another factor impacting the increase in interest expense and the cost of funds was a significant deposit by a related party to our tiered premium money market account. The funds were delivered during the first quarter of 2019 and intended as a temporary deposit, but remained throughout the year. Due to deposit volume and structure of the account, these funds contributed approximately 5bps to overall cost of funds during the year. During the first quarter of 2020, approximately half of the funds were withdrawn.

 

Due to the increased deposit balances, we were able to reduce borrowings from the FHLB, and hence the interest paid on those advances, by $68 thousand, or 46.6%, in 2019 compared to 2018. However, the general rise in interest rates impacted interest paid on trust preferred securities which increased $23 thousand, or 3.0%, year-over-year.

 

During the latter half of 2019, the prime interest rate dropped three times by 25bps each based on actions by the Federal Open Market Committee. During the year the prime interest rate fell from 5.50% to 4.75%. This was essentially full circle from the cycle in 2018 when the prime interest rate increased from 4.50% to 5.50%. In response to the economic impact resulting from the COVID-19 pandemic, the federal funds rate has been lowered twice during the first quarter of 2020 by a total of 150bps. As a result the prime interest rate now stands at 3.25%.

 

While the growth in earning assets, principally loans, was the primary driver in the increase in net interest income for 2019, the impact of increases in the general interest rate environment during 2018 also contributed to increased interest income. Hence, our return on earning assets increased 11bps to 4.74% during 2019, while our cost of interest bearing liabilities rose 32bps to 1.26%. Overall, this decreased our net interest margin to 3.82% in 2019 compared to 3.94% in 2018. Unless we are able to continue to increase the volume of our interest-earning assets going forward, while controlling our cost of funds, we may continue to experience compression on the net interest margin. New and renewed loans are often being repriced at lower interest rates while we anticipate no increase in interest rates in the foreseeable future, due to the economic impact of the COVID-19 pandemic.

 20 

 

One other item that may impact our future interest rate structure is the pending end of the use of LIBOR as a benchmark interest rate in 2021. We use LIBOR in pricing some of our interest earning assets and liabilities, including our trust preferred securities. At this time it appears that LIBOR will be replaced by the Secured Overnight Financing Rate (SOFR), which is a transparent measure of the cost of borrowing cash overnight collateralized by Treasury securities. Regardless of whether SOFR or some other benchmark rate replaces LIBOR, we do not anticipate that the change will have a material impact on our ability to negotiate and price earning assets and liabilities.

 

Nonaccruing loans totaled $5.2 million at December 31, 2019 compared to $6.4 million at December 31, 2018. This represents a decrease of $1.2 million, or 19.0%. In 2019, 94 nonperforming and under performing loans totaling $4.4 million were sold, resulting in a net recovery to the allowance for loans losses of $56 thousand. In 2018, four nonperforming or underperforming loans totaling $1.9 million were sold after determining that it was more cost effective to dispose of the accounts rather than continue to pursue collection efforts. Charge-offs of $365 thousand were recorded against the allowance for loan losses

 

Although nonaccrual loan balances decreased during 2019, the remaining accounts negatively affect interest income as these loans are nonearning assets. 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, the interest income on the loan is computed using the effective interest method. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.

 

 21 

 

 

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

 

                                           
Net Interest Margin Analysis  
Average Balances, Income and Expense, and Yields and Rates  
(Dollars in thousands)  
        For  the Year Ended   For  the Year Ended   For  the Year Ended  
        December 31, 2019   December 31, 2018   December 31, 2017  
        Average   Income/   Yields/   Average   Income/   Yields/   Average   Income/   Yields/  
        Balance   Expense   Rates   Balance   Expense   Rates   Balance   Expense   Rates  
ASSETS                                      
  Loans (1), (2), (3) $ 555,733 $ 28,601   5.15% $ 526,007 $ 26,375   5.01% $ 488,425 $ 24,163   4.95%  
  Federal funds sold   254   5   2.15%   160   4   2.50%   75   1   1.33%  
  Interest bearing deposits   38,994   805   2.06%   19,644   379   1.93%   15,735   192   1.22%  
  Other investments (3)   58,726   1,544   2.63%   68,706   1,714   2.49%   75,069   1,637   2.18%  
  Total Earning Assets   653,707   30,955   4.74%   614,517   28,472   4.63%   579,304   25,993   4.49%  
  Less:  Allowance for loans losses   (5,309)           (5,551)           (6,136)          
  Non-earning assets   60,673           66,648           79,107          
    Total Assets $ 709,071           675,614           652,275          
                                     
LIABILITIES AND STOCKHOLDERS’ EQUITY  
  Deposits                                      
  Demand – Interest bearing $ 35,364 $ 65   0.18% $ 37,896 $ 55   0.15% $ 35,235 $ 48   0.14%  
  Savings and money market   154,500   980   0.63%   131,292   368   0.28%   124,826   187   0.15%  
  Time deposits   260,452   4,060   1.56%   257,262   2,921   1.14%   255,986   2,234   0.87%  
  Other Borrowings   5,985   78   1.30%   9,610   148   1.54%   9,830   151   1.54%  
  Trust Preferred  Securities   16,496   796   4.83%   16,496   773   4.69%   16,496   593   3.59%  
  Total interest bearing liabilities   472,797   5,979   1.26%   452,556   4,265   0.94%   442,373   3,213   0.73%  
  Non-interest bearing deposits   174,944           164,923           154,356          
  Other liabilities   8,470           7,906           6,468          
    Total Liabilities   656,211           625,385           603,197          
  Stockholders’ Equity   52,880           50,229           49,078          
    Total Liabilities and Stockholders’ Equity $ 709,091           675,614           652,275          
  Net Interest Income     $ 24,976         $ 24,207         $ 22,780      
  Net Interest Margin       3.82%           3.94%           3.92%  
  Net Interest Spread           3.47%           3.69%           3.76%  
                                           
(1)  Non-accrual loans have been included in the average balance of loans outstanding.          
(2)  Loan fees have been included in interest income on loans.                
(3)  Tax exempt income is not significant and has been treated as fully taxable.                
                                                                                                                 

 22 

 

 

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

 

 

         
                                             Volume and Rate Analysis  
                                                     (Dollars in thousands)  
    2019 Compared to 2018   2018 Compared to 2017  
    Increase (Decrease)   Increase (Decrease)  
                               
      Volume Effect   Rate Effect   Change in Interest Income/ Expense     Volume Effect   Rate Effect   Change in Interest Income/ Expense  
Interest Income:                            
  Loans $ 1,491 $ 734 $ 2,226   $ 1,859 $ 354 $ 2,213  
  Federal funds sold   2   (1)   1     1   2   3  
  Interest bearing deposits   373   53   426     48   139   187  
  Other investments   (249)   79   (170)     (139)   216   77  
  Total Earning Assets   1,617   865   2,483     1,769   711   2,480  
                               
Interest Bearing Liabilities:                              
  Demand   (4)   14   10     4   3   7  
  Savings and money market   65   547   612     10   171   181  
  Time deposits   36   1,103   1,139     11   676   687  
  Other borrowings   (56)   (14)   (70)     (3)   -   (3)  
  Trust Preferred Securities   -   23   23     -   180   180  
  Total Interest Bearing Liabilities   41   1,673   1,714     22   1,030   1,052  
  Change in Net Interest Income $ 1,576 $ (807) $ 769   $ 1,748 $ (320) $ 1,428  
                                       

 

Loans

 

Our primary source of income comes from interest earned on loans. Total loan balances increased $15.4 million in 2019, or 2.8%, to $562.5 million at December 31, 2019 as compared to $547.1 million at December 31, 2018. The main driver in this increase in total loans is our strategy to grow and diversify the loan portfolio. Loans rated substandard or doubtful decreased $2.1 million, or 29.4%, to $5.1 million at December 31, 2019 from $7.3 million at December 31, 2018.

 

Loans receivable outstanding are summarized as follows:

 

                
   Loan Portfolio
December 31,
(Dollars in thousands)  2019  2018  2017  2016  2015
Commercial, financial and agricultural  $81,291   $83,135   $68,506   $55,073   $47,490 
Real estate – construction   31,130    35,119    29,763    25,755    14,672 
Real estate – commercial   170,436    140,862    127,688    103,331    98,569 
Real estate – residential   256,560    263,442    264,640    262,282    255,870 
Installment loans to individuals   23,127    24,538    22,411    22,188    24,568 
Total  $562,544   $547,096   $513,008   $468,629   $441,169 

 

 23 

 

 

Our loan maturities as of December 31, 2019 are shown in the following table:

 

Maturities of Loans

             
             
(Dollars in thousands)  Less than One Year  One to Five Years  After Five Years  Total
Commercial, financial and agricultural  $18,089   $38,914   $24,288   $81,291 
Real estate – construction   5,223    13,307    12,600    31,130 
Real estate – commercial   22,864    67,266    80,306    170,436 
Real estate – residential   14,376    39,340    202,844    256,560 
Installment loans to individuals   4,654    16,742    1,731    23,127 
Total  $65,206   $175,569   $321,769   $562,544 
                     
Loans with fixed rates  $61,938   $158,197   $139,053   $359,188 
Loans with variable rates   3,268    17,372    182,716    203,356 
Total  $65,206   $175,569   $321,769   $562,544 

 

Provision for Loan Losses

 

The methodology we use to calculate 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. As a result of the severe economic downturn during the first quarter of 2020, we will be assessing our methodology and adjusting qualitative factors and assessing the potential future impact of these economic changes on our loan portfolio and the related allowance for loan losses, which may result in additional provisions to the allowance.

 

The allowance for loan losses increased to $5.4 million at December 31, 2019 as compared to $5.3 million at December 31, 2018. The allowance for loan losses at the end of 2019 was approximately 0.95% of total loans as compared to 0.98% at the end of 2018. Provisions for loan losses of $2.1 million were recorded during 2019 and $252 thousand in 2018. Loans charged off, net of recoveries, were $2.0 million, or 0.36% of average loans, for the year ended December 31, 2019, compared to $1.1 million, or 0.21% of average loans, in 2018. 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 adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.

 

Nonaccruing loans present higher risks of default, but we have experienced a decrease in nonaccruing loans in 2019. At December 31, 2019, there were 74 nonaccruing loans totaling $5.2 million, or 0.92% of total loans. At December 31, 2018, there were 100 nonaccruing loans totaling $6.4 million, or 1.16% of total loans. The amount of interest income that would have been recognized on these loans had they been accruing interest was $714 thousand and $500 thousand in the years 2019 and 2018, respectively. There were no loans past due 90 days or greater and still accruing interest at December 31, 2019 or 2018, respectively. There are no commitments to lend additional funds to non-performing borrowers.

 

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 exposure to losses in cases of default. However, during the last economic downturn, the real estate values in the Bank’s market materially declined which negatively impacted the Bank. Over the past few years, as the economy recovered, real estate values have somewhat stabilized. While we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries. While the coal industry has been impacted by the increase in natural gas supplies from “fracking”, recent changes in the regulatory environment have aided the coal industry. As a result of the economic impact of the COVID-19 pandemic, the coal and gas industries have been adversely impacted by the global and national economic slowing, combined with the recent significant decrease in the cost of oil. We are monitoring these industries and consider these factors to be the primary higher risk characteristics of the loan portfolio.

 

Commercial and commercial real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer. Guidance for the risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.

 24 

 

 

With regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged-off.

 

For non 1-4 family residential loans that are 90 days past due or greater or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.

 

All loans classified as substandard, doubtful or loss are individually reviewed for impairment in accordance with Accounting Standards Codification (ASC) 310-10-35. In evaluating impairment, a current appraisal is generally used to determine if the collateral is sufficient. Appraisals are typically less than a year old and have to be independently reviewed to be relied upon. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable.  If this review determines that the appraisal is not reasonable, then a new appraisal is ordered. Loans considered impaired decreased to $5.6 million with $919 thousand requiring a valuation allowance of $323 thousand at December 31, 2019 as compared to $8.0 million with $1.3 million requiring a valuation allowance of $318 thousand at December 31, 2018. Management is aggressively working to reduce the impaired credits at minimal loss.

 

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

 

Following is a summary of non-accruing loans, loans past due longer than 90 days still accruing interest, and restructured loans:

 

Non-Accrual, Past Due, and Restructured Loans

(Dollars in thousands)

December 31,

                     
    2019   2018   2017   2016   2015
Non-accruing loans                    
   Commercial, financial and agricultural $ 943 $ 1,719 $ 1,868 $ 1,086 $ 1,244
   Real estate – construction   45   157   470   319   436
   Real estate – commercial   1,601   784   2,035   3,403   4,358
   Real estate – residential   2,544   3,702   3,143   8,521   8,768
   Installment loans to individuals   23   7   48   76   41
Total Non-accruing loans   5,156   6,369   7,564   13,405   14,847
Loans past due 90 days or more and still accruing   -   -   -   -   -
Troubled debt restructurings (accruing)   3,650   4,909   4,932   7,310   7,198
Total $ 8,806 $ 11,278 $ 12,496 $ 20,715 $ 22,045
Percent of total loans   1.57%   2.06%   2.44%   4.42%   5.00%

 

The above table includes $570 thousand and $522 thousand in nonaccrual loans as of December 31, 2019 and 2018, respectively, which have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing as of December 31, 2019 and 2018. There were $4.3 million in loans classified as troubled debt restructurings as of December 31, 2019, as compared to $5.4 million in loans classified as troubled debt restructurings as of December 31, 2018.

 25 

 

 

In addition to impaired loans, the remaining loan portfolio is evaluated based on net charge-off history, economic conditions, and internal processes. To calculate the net charge-off history factor, we perform a 12-quarter look-back and use the average net charge offs as a percentage of the loan balances. To calculate the economic conditions factor, we use current economic data which includes national and local regional unemployment information, local housing price changes, gross domestic product growth, and interest rates. Lastly, we also evaluate our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices. As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may be needed to the allowance for loan losses. The following table provides a summary of the activity in the allowance for loan losses.

 

Analysis of the Allowance for Loan Losses

(Dollars in thousands)

 

For the Years Ended December 31,

                     
Activity   2019   2018   2017   2016   2015
Beginning Balance $ 5,336 $ 6,196 $ 6,072 $ 7,493 $ 9,922
Provision charged to expense   2,050   252   450   (500)   (2,200)

Advances made on loans with

off balance sheet provision

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Loan Losses:                    
Commercial, financial and agricultural   (1,812)   (675)   (64)   (67)   (182)
Real estate – construction   -   (96)   (1)   (5)   (226)
Real estate – commercial   (192)   (334)   (179)   (557)   (724)
Real estate – residential   (336)   (290)   (714)   (738)   (1,127)
Installment loans to individuals   (114)   (75)   (147)   (83)   (101)
          Total loan losses   (2,454)   (1,470)   (1,105)   (1,450)   (2,360)
Recoveries:                    
Commercial, financial and agricultural   92   157   519   172   1,629
Real estate – construction   34   11   -   26   215
Real estate – commercial   16   73   193   220   147
Real estate – residential   232   73   48   87   99
Installment loans to individuals   62   44   19   24   41
           Total recoveries   436   358   779   529   2,131
Net charge offs   (2,018)   (1,112)   (326)   (921)   (229)
Balance at End of Period $ 5,368 $ 5,336 $ 6,196 $ 6,072 $ 7,493
Net charge offs as a % of average loans   0.36%   0.21%   0.07%   0.20%   0.05%

 

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

 

The allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 23% of the allowance to commercial real estate loans, which constituted 30.30% of our loan portfolio at December 31, 2019. This allocation decreased when compared to the 26% in 2018 due to the $29.6 million increase in commercial real estate loans during the year. We have allocated 36% of the allowance to commercial loans, which constituted 14.45% of our loan portfolio at December 31, 2019. This allocation increased by $1.2 million compared to December 31, 2018, due to losses realized in this segment of the portfolio during 2019, as discussed previously.

 

Both residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

 

We have allocated 3% of the allowance to real estate construction loans, which constituted 5.53% of our loan portfolio at December 31, 2019. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Values may not always be easily ascertainable as evidenced by the current market conditions. These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities.

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We have allocated 34% of the allowance to residential real estate loans, which constituted 45.61% of our loan portfolio at December 31, 2019. Our allocation decreased as a percentage of the allowance for loan losses due to the $6.9 million decrease in residential real estate loans during 2019.

 

We have allocated 4% of the allowance to consumer installment loans, which constituted 4.11% of our loan portfolio at December 31, 2019, which was comparable to the 3% allocation we had in 2018.

 

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

 

Allocation of the Allowance for Loan Losses

December 31, 2015 through December 31, 2019

(Dollars in thousands)

 

   

 

 

                             
    December 31, 2019   December 31, 2018   December 31, 2017
    Amount

 

 

% of ALLL   %of Loans   Amount   % of ALLL   %of Loans   Amount   % of ALLL   % of Loans
Commercial $ 1,932   36%   14.45% $ 775   15%   15.20% $ 1,098   18%   13.35%
R/E–const.   158   3%   5.53%   202   4%   6.42%   191   3%   5.80%
R/E–comm.   1,248   23%   30.30%   1,386   26%   25.75%   1,989   32%   24.89%
R/E-resid.   1,840   34%   45.61%   2,526   47%   48.15%   2,506   41%   51.59%
Installment   188   4%   4.11%   172   3%   4.49%   156   2%   4.37%
Unallocated   2   0%       275   5%       256   4%    
Total $ 5,368   100%   100.00% $ 5,336   100%   100.00% $ 6,196   100%   100.00%
                                     
    December 31, 2016   December 31, 2015            
   

 

Amount

  % of ALLL   % of Loans  

 

Amount

  % of ALLL   % of Loans            
Commercial $ 622   10%   11.75% $ 1,066   14%   10.76%            
R/E-const.   346   6%   5.50%   332   4%   3.33%            
R/E-comm.   1,625   27%   22.05%   2,384   36%   22.34%            
R/E-resid.   2,617   43%   55.97%   2,669   32%   58.00%            
Installment   123   2%   4.73%   128   2%   5.57%            
Unallocated   739   12%       914   12%                
Total $ 7,493   100%   100.00% $ 7,493   100%   100.00%            

 

Other Real Estate Owned

 

Other real estate owned decreased $2.5 million, or 42.8%, to $3.4 million at December 31, 2019 from $5.9 million at December 31, 2018. All properties are available for sale by commercial and residential realtors under the direction of our Special Assets division. Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping in mind the impact to earnings and capital. In 2019 and 2018, pricing adjustments were made to make certain properties more marketable, which, in some cases, reduced the price below the fair value of the property (which is based on an appraisal less estimated disposition costs). During 2019, we recorded OREO writedowns of $214 thousand as compared to $542 thousand in 2018.

 

During 2019, we added $811 thousand in OREO properties as a result of settlement of foreclosed loans, offset by sales of $1.3 million with net losses totaling $123 thousand. Additionally, a closed branch office facility was transferred from Bank Premises to OREO at a value of $683 thousand. During 2018, we added $1.7 million in OREO properties as a result of settlement of foreclosed loans, which was offset by sales of $1.4 million with net losses totaling $135 thousand. As previously discussed we continue to take an aggressive approach toward liquidating properties to reduce our level of foreclosed properties by making pricing adjustments and holding auctions on some of our older properties. We expect to continue these efforts in 2020, which could result in additional losses, while reducing future carrying costs.

 

Although the properties remain for sale and are actively marketed, we do have lease agreements on certain other real estate owned properties which are generating rental income at market rates. Rental income on OREO properties was $63 thousand in 2019, a decrease of $142 thousand, or 69.1%, when compared to the $205 thousand recognized in 2018. The decrease in rental revenue is a direct result from the decrease in the volume of foreclosed properties.

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Investment Securities

 

Total investment securities decreased $8.8 million, or 14.7%, to $50.6 million at December 31, 2019 from $59.4 million at December 31, 2018. All securities are classified as available-for-sale for liquidity purposes. No securities were sold during 2019 or 2018. However, paydowns on mortgage backed securities totaled $10.7 million. Purchases of securities totaled $790 thousand during 2019. Investment securities with a carrying value of $6.9 million and $8.0 million at December 31, 2019 and 2018, were pledged to secure public deposits and for other purposes required by law.

 

Our strategy is to invest excess funds in investment securities to increase interest income while providing for liquidity instead of other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Due to loan demand during 2019 and 2018, most funds resulting from securities maturities and repayments were used to fund the loan portfolio. We anticipate maintaining or slightly increasing the size of the portfolio during 2020. The portfolio is comprised of, what we believe to be, short to mid-term investments, as mortgage backed securities and collateralized mortgage obligations generally repay at a faster rate than their contractual maturities. The carrying values of investment securities and the different types of investments are shown in the following table:

 

Investment Securities Portfolio

(Dollars in thousands)

December 31,  2019  2018  2017
Available for  Sale  Amortized Cost  Fair  Value  Amortized Cost  Fair  Value  Amortized Cost  Fair  Value
U.S. Government Agencies  $15,703   $15,633   $19,755   $19,389   $23,986   $23,844 
Taxable municipals   4,389    4,442    4,428    4,313    4,466    4,397 
Corporate bonds   5,408    5,523    5,422    5,320    5,437    5,579 
Mortgage backed securities   25,077    25,051    31,366    30,385    37,950    37,268 
Total Securities AFS  $50,577   $50,649   $60,971   $59,407   $71,839   $71,088 


 

The fair value of our investment portfolio is substantially affected by changes in interest rates, which could result in realized losses if we have to sell the securities and recognize the loss in a rising interest rate environment due to Federal Reserve actions, U.S. fiscal policies or other factors affecting market interest rates. At December 31, 2019, we had an unrealized gain in our investment portfolio totaling $72 thousand as compared to a $1.6 million unrealized loss at December 31, 2018. We have reviewed our investment portfolio and no investment security is deemed to have an other than temporary impairment. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.

 

The amortized cost, fair value and weighted average yield of investment securities at December 31, 2019 are shown by contractual maturity and do not reflect principal paydowns for amortizing securities in the following schedule. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Maturities of Securities

             
  Weighted
(Dollars are in thousands) Amortized   Fair   Average
Securities Available for Sale Cost   Value   Yield
Due in one year or less $ - $ -   -%
Due after one year through five years 4,710 4,752 2.53%
Due after five years through ten years   13,211   13,295   3.39%
Due after ten years   32,656   32,602   2.42%
Total $ 50,577 $ 50,649   2.68%

 

Bank Owned Life Insurance

 

At December 31, 2019 and 2018, we had an aggregate total cash surrender value of $4.6 million and $4.5 million, respectively, on life insurance policies covering current and former key officers.

 

Total income for the policies during 2019 and 2018 was $63 thousand and $57 thousand, respectively.

 

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Deposits

 

Total deposits were $621.5 million at December 31, 2019, an increase of $25.5 million, or 4.3%, from $596.0 million at December 31, 2018. Most of the increase has been in money market deposit accounts, which grew $18.8 million during 2019. Noninterest bearing deposits grew by $6.5 million, while interest-bearing demand deposits increased $2.5 million.

 

Core deposits, which are mainly transaction accounts, commercial relationships and savings products, increased as noninterest bearing deposits grew 3.9%, or $6.5 million, from $164.3 million at December 31, 2018 to $170.8 million at December 31, 2019. Interest-bearing demand deposit accounts grew 7.2%, or $2.5 million, to $37.1 million at December 31, 2019. Savings accounts decreased by $182 thousand to $95.1 million and money market deposits increased $18.8 million, or 48.3%, to $57.8 million at December 31, 2019 as compared to $39.0 million at December 31, 2018. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.

 

Time deposits of $100,000 or more equaled approximately 19.5% of deposits at the end of 2019 and 19.3% of deposits at the end of 2018.

 

The $2.8 million of brokered deposits we held at December 31, 2018 matured in 2019. These deposits were used to fund a particular 10 year balloon mortgage product. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section above. Total Certificate of Deposit Registry Service (CDARS) time deposits were $11.2 million and $10.7 million at December 31, 2019 and 2018, respectively.

 

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

 

 

   
Maturities of Time Deposits of $100 Thousand and More
(Dollars in thousands)
December 31, 2019
Three months or less $14,468 
Over three months through six months  23,115 
Over six months through twelve months  32,393 
Over one year  51,513 
Total $121,489 



 

Noninterest Income

 

For the year ended December 31, 2019, noninterest income increased to $8.6 million, or 1.22% of average assets, from $7.6 million, or 1.13% of average assets, for the same period in 2018, an increase of $1.0 million, or 13.7%. This increase was primarily due to the $803 thousand non-recurring gain recognized on the sale and leaseback of our Lebanon, Virginia office. Service charges decreased $98 thousand during 2019, primarily due to the reduced volume of overdraft activity. For 2019, card processing and interchange revenue totaled $3.0 million, an increase of $205 thousand or 7.3% compared to 2018, due to increased volume of card transactions. During the fourth quarter of 2019, we negotiated the renewal of the card servicing contact with our provider. This renewal should result in a modest increase in the interchange fee, along with a reduction in the processing costs, starting in 2020. Financial services fees for 2019 were $663 thousand, an increase of $60 thousand, or 9.9%, from the $603 thousand recognized in 2018. We continue to focus efforts on our financial services operations as we believe this segment continues to show potential for future growth. In addition, secondary market mortgage origination revenue, included in other noninterest income, increased approximately 105% to $247 thousand, based on increased volume and changes made to the program during the year. We continue to make efforts to increase the volume of loans originated for sale on the secondary market.

 

Noninterest Expense

 

Noninterest expenses decreased $1.5 million, or 4.9%, to $29.0 million in 2019. This overall decrease was due to a combination of events and efforts. These included a decrease in staffing, renegotiation of contracts for data circuit and telephone services, benefit of credits applied to deposit insurance premiums, reduced costs associated with the holding and disposal of OREO and the non-recurrence of expense items recorded in 2018.

 

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Salaries and employee benefits decreased from $14.2 million in 2018 to $14.1 million in 2019. In 2019, we exited our legacy self-insured health benefits plan and created a new plan for our principal self-insured health care benefits. We retained a new plan administrator who assists us in monitoring claims and working with our employees in obtaining the best outcomes. We believe that over the next few years, this change will aid in improving employee care and moderating costs. Total full time equivalent employees have decreased to 229 at December 31, 2019 from 250 at December 31, 2018, a decrease of 21, or 8.4%. During the third quarter of 2019 we implemented a restructuring of our credit and loan operations functions and other administrative positions, resulting in the elimination of ten positions; with a net reduction of five employees, as some affected personnel filled other vacant positions. During 2019, we continued streamlining our processes to help us achieve greater efficiencies. We also continued our ongoing investment in training our employees as we continue to migrate to the universal banker model, where customer service personnel are trained in multiple job functions rather than specializing in a single function. We anticipate the number of full time equivalent employees to decrease through attrition in the future as a result of these improved processes and training.

 

Occupancy and equipment expenses decreased $642 thousand to $4.5 million for the year 2019 compared to 2018. Depreciation expense decreased $315 thousand to $2.3 million in 2019 compared to 2018, due to aging out of some equipment. With the planned branch additions in Bristol, Virginia and Kingsport, Tennessee in 2020, it is expected that depreciation expense will increase in 2020 and future periods. Equipment maintenance costs decreased $93 thousand due to the change in some service levels and elimination of some agreements. Our reliance on ITMs, cash recyclers and coin counters to improve the customer experience and create operational efficiencies carries with it the costs related to recurring maintenance and repairs. We believe that the ITMs provide additional convenience by offering teller services from 7 AM to 7 PM Monday through Saturday. Facilities repairs and maintenance decreased $93 thousand due to renegotiating certain service contracts, along with a decline in individual repairs and maintenance events compared to 2018. Lease expense of $497 thousand for 2019 increased $18,000 as compared to $476 thousand in 2018, due to the leaseback of the Lebanon VA office.

 

Expenses related to OREO and repossessed assets declined by $391 thousand, or 38.1%, from $1.0 million in 2018 to $635 thousand in 2019. Foreclosed properties decreased during 2019 to $3.4 million at December 31, 2019 from $5.9 million at December 31, 2018. During 2019, we recorded net OREO writedowns of $214 thousand compared to $542 thousand in 2018. These writedowns were primarily the result of price reductions that helped us in securing sales that reduced our foreclosed properties by $2.5 million during the year. During 2019, we had net losses on the sale of OREO of $123 thousand compared to $135 thousand in 2018. Based on the reduced level of other real estate owned, we expect that costs related to holding and disposing of these properties will continue to decrease in 2020 and future periods.

 

Other operating expenses decreased $550 thousand or 6.6% to $7.8 million for 2019 from $8.4 million in 2018. FDIC deposit insurance decreased by $158 thousand to $222 thousand in 2019, due to a $103 thousand credit received from the FDIC as a result of our ability to utilize Small Bank assessment credits. Printing and supplies decreased year-over-year by $143 thousand due to a non-recurring writedown in 2018 of obsolete or misapplied inventory items totaling $168 thousand. Data circuit and telecommunication costs decreased by $171 thousand, or 30.0%, to $399 thousand in 2019 compared to $571 thousand in 2018, due to renegotiated contacts for data circuits and telecom services that were phased in during the year. Over the next five years we anticipate annualized savings of $198 thousand per year. Other expenses decreased $464 thousand due to a non-recurring write-off in 2018 of advanced escrow and other costs determined to be unrecoverable totaling $220 thousand, and an adjustment to prepaid excise and franchise taxes of $244 thousand. Consulting expense increased $528 thousand in 2019 to $829 thousand. This increase was principally due to the retention of an outside consulting firm to review our products and procedures to identify areas where we can enhance revenue and better manage costs. During the fourth quarter of 2019, fees of $233 thousand were recorded. As this project moves forward, it is anticipated that an additional $243 thousand of fees will be incurred. Based on progress through year-end it is estimated that, when fully implemented, pre-tax annual benefits will exceed $1.5 million. In addition to the fees related to the efficiency assessment, we also recognized fees totaling $456 thousand related to the negotiation of the card services contract renewal, and facilitating the sale of nonperforming and underperforming loans.

 

Our efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 86.23% in 2019 compared to 95.85% in 2018. The decrease in this ratio is a result of improvements in both noninterest income and noninterest expense discussed above. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity, and while we are optimistic about the potential impact of the efficiency assessment project, the recent economic impact of the COVID-19 pandemic has caused us to delay implementation of some of the recommendations, especially those related to service fee changes, to later in the year. As a result, the benefits of some of the planned changes will be delayed.

 

 30 

 

Income Taxes and Deferred Tax Assets

 

Income taxes were $522 thousand in 2019, compared to $149 thousand in 2018. The effective tax rates were 20.2%, and 14.0% for 2019 and 2018, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally as a result of tax-exempt income from loans as well as earnings from bank owned life insurance. The lower effective tax rate in 2018 when compared to 2019 is the result of the increase in pre-tax earnings in relation to the various tax preference items.

 

Deferred tax assets represent the future tax benefit of future deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, the Company did not include a valuation allowance against its deferred tax assets as of December 31, 2019 or 2018.

 

Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense.

 

As of December 31, 2019, the Company had Federal and state net operating loss carry forward amounts of approximately $16.9 million and $1.1 million, respectively. These amounts are not limited pursuant to Internal Revenue Code (IRC) Section 382. The Company is subject to examination in the United States and multiple state jurisdictions. Open tax years for examination are 2016 – 2019.

 

Capital Resources

 

Our total capital at the end of 2019 was $54.6 million compared to $51.3 million at the end of 2018. The increase was $3.4 million, or 6.5%. Book value per common share was $2.28 at December 31, 2019 compared to $2.14 at December 31, 2018.

 

The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015, and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.

 

The Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The capital adequacy ratios for the Bank are set forth below along with the minimum ratios to be considered “well capitalized” under such regulations:

 

Capital Adequacy Ratios

 

      December 31,
   Well-Capitalized      
   Regulatory      
   Threshold  2019  2018
Tier 1 leverage   5.00%   9.43%   9.59%
Common equity tier 1   6.50%   13.72%   13.30%
Tier 1 risk-based capital   8.00%   13.72%   13.30%
Total risk-based capital   10.00%   14.83%   14.39%

 

The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a CET1 ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The CET1 ratio of the Bank was 13.72% as of December 31, 2019, exceeding the minimum requirement. The Tier 1 and total capital to risk-weighted asset ratios of the Bank were 13.72% and 14.83%, respectively, as of December 31, 2019, exceeding the minimum requirements. The leverage ratio of the Bank was 9.43% as of December 31, 2019, also exceeding the minimum requirements. As noted above, if we elect to opt into the new CBLR framework, the above capital measurements would no longer apply to us.

 31 

 

 

Total assets increased in 2019 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and the core deposit base of the Bank. Under current economic conditions, we believe it is prudent to continue to increase capital to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates further. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.

 

No cash dividends have been paid historically and we do not anticipate paying cash dividends in the foreseeable future as long as the Company continues to have a retained deficit. Earnings will continue to be retained to build capital and position the Company to pay a dividend to its shareholders as soon as practicable.

 

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. Collectively, those balances were $93.9 million at December 31, 2019, down from $79.5 million at December 31, 2018. A surplus of short-term assets are maintained at levels management deems adequate to meet potential liquidity needs during 2019.

 

At December 31, 2019, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $43.7 million, which is net of the $6.9 million of securities pledged as collateral. This will serve as a source of liquidity while yielding a higher return when compared to other short term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Total investment securities decreased $8.8 million, or 14.7%, to $50.6 million at December 31, 2019 from $59.4 million at December 31, 2018.

 

Our loan to deposit ratio was 90.52% at December 31, 2019 and 91.80% at year-end 2018.

 

Available third party sources of liquidity remain intact at December 31, 2019 which includes the following: our line of credit with the FHLB totaling $176.4 million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. We have $20.0 million in unsecured federal funds lines of credit from three correspondent banks as of December 31, 2019, which gives us an additional source of liquidity.

 

We have used our line of credit with FHLB to issue letters of credit totaling $17.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit. An additional $154.4 million was available on December 31, 2019 on the $176.4 million line of credit, of which $142.3 million is secured by a blanket lien on our residential real estate loans.

 

While we have access to the brokered deposits market, we have no brokered deposits at December 31, 2019, and we had $2.8 million in brokered deposits at December 31, 2018. As of December 31, 2019, we do have $11.2 million in reciprocal CDARS time deposits, compared to $10.7 million at December 31, 2018.

 

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 the event of a liquidity crisis.

 

The Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s 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.

 

With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has 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. With the economic downturn resulting from the COVID-19 pandemic, we have heightened our monitoring of our liquidity position. Additionally, the Federal Reserve has taken actions to bolster liquidity in the markets.

 32 

 

Financial Instruments with Off-Balance-Sheet Risk

 

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

 

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

 

A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2019 and 2018 is as follows:

 

       
(Dollars in thousands)  2019  2018
Financial instruments whose contract amounts represent credit risk:          
Commitments to extend credit  $59,552   $55,144 
Standby letters of credit   2,582    2,798 

 

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

 

Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not actually be drawn upon to the total extent to which the Bank is committed.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.

 

Interest Sensitivity

 

At December 31, 2019, we had a negative cumulative gap rate sensitivity ratio of 31.36% for the one year re-pricing period, compared to 31.40% at December 31, 2018. A negative cumulative gap generally indicates that net interest income would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would likely decrease in periods during which interest rates are increasing. The below table is based on contractual maturities and does not take into consideration prepayment speeds of investment securities and loans nor does it consider decay rates for non-maturity deposits. When considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment. With the recent decreases in market rates, we believe our current interest risk profile is increasing, but remains acceptable. Furthermore, we are implementing strategies to maintain the current profile, or moderate the adverse impact to our current interest rate risk profile, for what could be a sustained medium- to long-term low interest rate environment.

 

 33 

 

Interest Sensitivity Analysis
December 31, 2019
(In thousands of dollars)
   

1 - 90

Days

  91-365 Days  

1- 3

Years

 

4-5

Years

 

6-15

Years

  Over 15 Years   Total
Uses of funds:                            
Loans $          70,245  $        41,896  $      107,015  $      170,564  $      116,193  $        56,633  $      562,546
Federal funds sold                 252                 -                    -                    -                    -                    -                 252
Deposits with banks            35,760                 -                    -                        -                    -            35,760
Investments              5,751           2,936           4,958           1,846         20,367         14,791         50,649
Bank owned life insurance              4,576                 -                    -                    -                    -                    -              4,576
Total earning assets $        116,584  $        44,832  $      111,973  $      172,410  $      136,560  $        71,424  $      653,783
                             
Sources of funds:                            
Int Bearing DDA            37,433                 -                    -                    -                    -                    -            37,433
Savings & MMDA          155,879                 -                    -                    -                    -                    -          155,879
Time Deposits            37,909       118,731         70,006         30,760                 -                    -          257,406
Trust Preferred Securities            16,496                 -                    -                    -                    -                    -            16,496
Federal funds purchased                   -                                        -   
Other Borrowings                   -                    -              5,000                 -                    -                    -              5,000
Total interest bearing liabilities $        247,717 $     118,731 $       75,006 $       30,760 $                 - $                 - $     472,214
                             
Discrete Gap $      (131,133) $      (73,899) $       36,967 $     141,650 $     136,560 $       71,424 $     181,569
Cumulative Gap $      (131,133) $    (205,032) $    (168,065) $      (26,415) $     110,145 $     181,569    
Cumulative Gap as % of Total Earning Assets   (20.06)%   (31.36)%   (25.71)%   (4.04)%   16.85%   27.77%    

 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 34 

 

Item 8. Financial Statements and Supplementary Data

 

FINANCIAL STATEMENTS

 

CONTENTS  
  Page
   
Report of the Independent Registered Public Accounting Firm  36 
     
Consolidated Balance Sheets December 31, 2019 and 2018  37 
  
Consolidated Statements of Income – Years Ended December 31, 2019 and 2018  38 
  
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2019 and 2018  39 
        
Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2019 and 2018  40 
   
Consolidated Statements of Cash Flows – Years Ended December 31, 2019 and 2018  41 
  
Notes to Consolidated Financial Statements  42 

 

 35 

 

 

 


 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of New Peoples Bankshares, Inc.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Elliott Davis, LLC

 

We have served as the Company's auditor since 2011.

 

Greenville, South Carolina

April 14, 2020

 

elliottdavis.com

  

 36 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2019 AND 2018

(in thousands except share data)

 

       
       
ASSETS  2019  2018
       
Cash and due from banks  $13,998   $12,245 
Interest-bearing deposits with banks   35,897    15,664 
Federal funds sold   252    264 
Total Cash and Cash Equivalents   50,147    28,173 
           
Investment securities available-for-sale   50,649    59,407 
           
Loans held for sale   2    —   
           
Loans receivable   562,544    547,096 
Allowance for loan losses   (5,368)   (5,336)
Net Loans   557,176    541,760 
           
Bank premises and equipment, net   22,242    24,195 
Other real estate owned   3,393    5,937 
Accrued interest receivable   2,115    1,934 
Deferred taxes, net   4,576    5,476 
Right-of-use assets – operating leases   5,835    4,942 
Other assets   10,238    10,318 
Total Assets  $706,373   $682,142 
           
LIABILITIES          
           
Deposits          
Noninterest bearing  $170,782   $164,298 
Interest-bearing   450,695    431,694 
Total Deposits   621,477    595,992 
           
Borrowed funds   21,496    27,126 
Lease liabilities – operating leases   5,835    4,942 
Accrued interest payable   694    587 
Accrued expenses and other liabilities   2,269    2,245 
Total Liabilities   651,771    630,892 
           
Commitments and Contingent Liabilities (Notes 19 and 20)          
           
STOCKHOLDERS’ EQUITY          
           
Common stock - $2.00 par value; 50,000,000 shares authorized;          
23,922,086 and 23,922,086 shares issued and outstanding at          
December 31, 2019 and 2018, respectively   47,844    47,844 
Additional paid-in capital   14,570    14,570 
Retained deficit   (7,869)   (9,928)
Accumulated other comprehensive income (loss)   57    (1,236)
Total Stockholders’ Equity   54,602    51,250 
Total Liabilities and Stockholders’ Equity  $706,373   $682,142 
           
           

 

The accompanying notes are an integral part of these financial statements.  

 37 

 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(in thousands except share and per share data)

  

       
       
INTEREST AND DIVIDEND INCOME  2019  2018
Loans including fees  $28,601   $26,375 
Federal funds sold   5    4 
Interest-earning deposits with banks   805    379 
Investments   1,388    1,559 
Dividends on equity securities (restricted)   156    155 
Total Interest and Dividend Income   30,955    28,472 
           
INTEREST EXPENSE          
Deposits   5,105    3,344 
Borrowed funds   874    921 
Total Interest Expense   5,979    4,265 
           
NET INTEREST INCOME   24,976    24,207 
           
PROVISION FOR LOAN LOSSES   2,050    252 
           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   22,926    23,955 
           
NONINTEREST INCOME          
Service charges and fees   3,605    3,703 
Card Processing and interchange income   3,014    2,809 
Insurance and investment fees   663    603 
Gain on sale and leaseback transaction   803    —   
Other noninterest income   567    492 
Total Noninterest Income   8,652    7,607 
           
NONINTEREST EXPENSES          
Salaries and employee benefits   14,106    14,203 
Occupancy and equipment expenses   4,514    5,156 
Data processing and telecommunications   2,541    2,749 
Other operating expenses   7,836    8,386 
Total Noninterest Expenses   28,997    30,494 
           
INCOME BEFORE INCOME TAXES   2,581    1,068 
           
INCOME TAX EXPENSE   522    149 
           
NET INCOME  $2,059   $919 
           
Income Per Share          
Basic and Diluted  $0.09   $0.04 
Average Weighted Shares of Common Stock          
Basic and Diluted   23,922,086    23,922,086 

 

         The accompanying notes are an integral part of these financial statements.                

 

 38 

 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(Dollars in thousands)

 

       
       
   2019  2018
       
NET INCOME  $2,059   $919 
           
Other comprehensive income (loss):          
     Investment securities activity:          
          Unrealized gains (losses) arising during the year   1,636    (813)
          Tax related to unrealized (gains) losses   (343)   171 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)   1,293    (642)
TOTAL COMPREHENSIVE INCOME  $3,352   $277 

 

The accompanying notes are an integral part of these financial statements.

 39 

 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(in thousands including share data)

 

                   
                   
   Shares of
Common
Stock
  Common
Stock
  Additional
Paid-in
Capital
  Retained
Deficit
  Accumulated
Other Comprehensive
Income (Loss)
  Total
Stockholders’
Equity
Balance,
December 31, 2017
   23,922   $47,844   $14,570   $(10,847)  $(594)  $50,973 
                               
Net income   —      —      —      919    —      919 
                               
Other
comprehensive
loss, net of tax
   —      —      —      —      (642)   (642)
                               
Balance,
December 31, 2018
   23,922   $47,844   $14,570   $(9,928)  $(1,236)  $51,250 
                               
Net income   —      —      —      2,059    —      2,059 
                               
Other
comprehensive
income, net of tax
   —      —      —      —      1,293    1,293 
                               
Balance,
December 31, 2019
   23,922   $47,844   $14,570   $(7,869)  $57   $54,602 
                               

 

The accompanying notes are an integral part of these financial statements.

 40 

 

 

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

(Dollars are in thousands)

 

       
   2019  2018
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $2,059   $919 
Adjustments to reconcile net income to net cash provided by
operating activities:
          
Depreciation   2,311    2,626 
Provision for loan losses   2,050    252 
Income on bank owned life insurance   (63)   (57)
Gain on sale of mortgage loans   (138)   —   
Gain on sale and leaseback transactions   (803)   —   
Loss on sale of premises and equipment   1    46 
Loss on sale of foreclosed real estate   123    135 
Loans originated for sale   (7,937)   —   
Proceeds from sales of loans originated for sale   12,432    —   
Adjustment of carrying value of foreclosed real estate   214    542 
Amortization/accretion of bond premiums/discounts   528    644 
Deferred tax  expense (benefit)   556    195 
Net change in:          
Interest receivable   (181)   102 
Other assets   265    51 
Accrued interest payable   107    161 
Accrued expenses and other liabilities   24    (1,215)
Net Cash Provided by Operating Activities   11,548    4,401 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Net increase in loans   (19,632)   (37,893)
Proceeds from the sale of loans   —      1,543 
Purchase of securities available-for-sale   (790)   (967)
Proceeds from repayments and maturities of securities available-for-sale   10,657    11,190 
Net (purchase) sale of equity securities (restricted)   (14)   21 
Payments for the purchase of premises and equipment   (1,550)   (1,647)
Proceeds from sale and leaseback transactions   550    —   
Proceeds from sale of premises and equipment   9    895 
Proceeds from insurance claims on other real estate owned   19    —   
Proceeds from sales of other real estate owned   1,322    1,405 
Net Cash Used in Investing Activities   (9,429)   (25,453)
           
CASH FLOWS FROM FINANCING ACTIVIES          
Net change in short term borrowings   (5,630)   3,072 
Net change in non-interest bearing deposits   6,484    9,667 
Net change in interest bearing deposits   19,001    3,781 
Net Cash Provided by Financing Activities   19,855    16,520 
Net increase (decrease) in cash and cash equivalents   21,974    (4,532)
Cash and Cash Equivalents, Beginning of the Year   28,173    32,705 
Cash and Cash Equivalents, End of the Year  $50,147   $28,173 
           
Supplemental Disclosure of Cash Paid During the Year for:          
Interest  $5,872   $4,104 
Taxes  $(34)  $320 
Supplemental Disclosure of Non Cash Transactions:          
Right-of-use assets obtained in exchange for new operating lease liabilities  $1,232   $—   
Transfer of loans to loans held for sale  $4,359   $—   
Loan made to finance sale of premises and equipment  $752   $—   
Other real estate acquired in settlement of foreclosed loans  $811   $1,719 
Loans made to finance sale of foreclosed real estate  $2,360   $569 
Transfer of premises and equipment to other real estate  $683   $—   
Change in unrealized gains (losses) on securities available for sale  $1,637   $(813)

  

 

The accompanying notes are an integral part of these financial statements.

 41 

 

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 NATURE OF OPERATIONS

 

Nature of Operations – New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). The Bank is organized and incorporated under the laws of the Commonwealth of Virginia. 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 Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.

 

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation - The consolidated financial statements include the New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as the Company, we us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.

 

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

 

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

 

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

 

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

 

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

 

It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in the process of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.

 42 

 

 

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

 

Significant Group Concentrations of Credit Risk – The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $13.6 million as of December 31, 2019. Most of the Company’s activities are with customers located within the southwest Virginia, southern West Virginia, and northeastern Tennessee region. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer.

 

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

 

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

 

In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non 1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.

 

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

 43 

 

 

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

 

Type   Estimated useful life
Buildings   39 years
Paving and landscaping   15 years
Computer equipment and software   3 to 5 years
Vehicles   5 years
Furniture and other equipment   5 to 10 years

 

Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred.

Income Taxes – Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company has provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. At December 31, 2019 and 2018, the Company had no valuation allowance on its net deferred tax assets.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses.

 

Income Per Share – Basic income 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 common stock warrants and are determined by the Treasury Method.

 

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

 

Financial Instruments – Fair Value - In January 2016, the Financial Accounting Standards Board (the FASB) amended the Financial Instruments topic of the ASC, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments became effective on January 1, 2018 and did not have a material effect on the financial statements. As discussed in Note 22, the Company measures the fair value of its loan portfolio using an exit price notion.

 

Comprehensive Income (Loss) – GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The change in unrealized gains and losses on available-for-sale securities is our only component of other comprehensive income.

 

Revenue from Contracts with Customers - “Revenue from Contracts with Customers”. Accounting Standards Update (ASU) 2014-9 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance does not apply to revenue associated with financial instruments, including loans and securities. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. The Company has evaluated revenue streams within noninterest income to assess the applicability of this guidance and determined that service charges on deposits, card processing and interchange income and financial service fees are within the scope of this ASU. Because performance obligations are satisfied as services are rendered and the fees are fixed, there is little judgment involved in applying the guidance that significantly affects the determination of the amount and timing of revenue from contracts with customers. Adoption of this standard did not change the timing or pattern of the recognition of revenue for the services covered by this ASU.

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Advertising Cost – Advertising costs are expensed in the period incurred. For 2019 and 2018, those costs totaled $208 thousand and $286 thousand, respectively.

 

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

 

Subsequent Events – The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information.

 

NOTE 3 INCOME PER SHARE

 

Basic income 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 common stock warrants and are determined by the Treasury Method. For the years ended December 31, 2019 and 2018, there were no potential common shares. Basic and diluted net income per common share calculations follows:

 

(Amounts in thousands, except  For the years ended
share and per share data)  December 31,
    
    2019    2018 
Net income  $2,059   $919 
Weighted average shares outstanding   23,922,086    23,922,086 
Weighted average dilutive shares outstanding   23,992,086    23,992,086 
Basic and diluted income per share  $0.09   $0.04 

 

 

NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS

 

The Bank had federal funds sold and cash on deposit with other commercial banks amounting to $36.1 million and $15.9 million at December 31, 2019 and 2018, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.

 

The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank of Richmond (the Federal Reserve Bank). At December 31, 2019 and 2018, all required reserves were met by the Bank’s vault cash.

 

The Bank has a total of $20.0 million in unsecured fed funds lines of credit facilities from three correspondent banks that were available at both December 31, 2019 and 2018. Of these total commitments, all were available at December 31, 2019 and $16.37 million was available at December 31, 2018. A condition for $5.0 million of the unsecured fed funds line of credit is that the Bank agreed to maintain a minimum deposit balance with this correspondent bank of $200 thousand. As of December 31, 2019 and 2018, the Bank was in compliance with this requirement.

 

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NOTE 5 INVESTMENT SECURITIES

 

The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 2019 and December 31, 2018 are as follows:

 

        Gross   Gross   Approximate
  Amortized   Unrealized   Unrealized   Fair
(Dollars are in thousands) Cost   Gains   Losses   Value
December 31, 2019
U.S. Government Agencies $ 15,703 $ 57 $ 127 $ 15,633
Taxable municipals   4,389   54   1   4,442
Corporate bonds   5,408   115   -   5,523
Mortgage backed securities   25,077   111   137   25,051
Total Securities available for sale $ 50,577 $ 337 $ 265 $ 50,649

 

December 31, 2018
U.S. Government Agencies $ 19,755 $ 26 $ 392 $ 19,389
Taxable municipals   4,428   -   115   4,313
Corporate bonds   5,422   47   149   5,320
Mortgage backed securities   31,366   11   992   30,385
Total Securities available for sale $ 60,971 $ 84 $ 1,648 $ 59,407

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019 and December 31, 2018.

 

   Less than 12 Months  12 Months or More  Total
(Dollars are in thousands)  Fair Value  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
  Fair
Value
  Unrealized
Losses
December 31, 2019                  
U.S. Government Agencies  $6,788   $46   $4,516   $81   $11,304   $127 
Taxable municipals   1,049    1    -    -    1,049    1 
Corporate bonds   -    -      -    -    -    - 
Mtg. backed securities   1,586    4    12,002    133    13,588    137 
Total Securities AFS  $9,423   $51   $16,518   $214   $25,941   $265 
                               
December 31, 2018                              
U.S. Government Agencies  $5,013   $68   $11,585   $324   $16,598   $392 
Taxable municipals   -    -    4,049    115    4,049    115 
Corporate bonds   1,713    43    1,423    106    3,136    149 
Mtg. backed securities   165    2    29,245    990    29,410    992 
Total Securities AFS  $6,891   $113   $46,302   $1,535   $53,193   $1,648 
                               

At December 31, 2019, the available-for-sale portfolio included 100 investments for which the fair market value was less than amortized cost. At December 31, 2018, the available-for-sale portfolio included 137 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. Based on the Company’s analysis, the Company concluded that no securities had an other-than-temporary impairment at December 31, 2019 or December 31, 2018.

 

Investment securities with a carrying value of $6.9 million and $8.0 million at December 31, 2019 and 2018, respectively, were pledged to secure public deposits and for other purposes required by law.

 

No investment securities were sold during 2019 or 2018. 

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The amortized cost and fair value of investment securities at December 31, 2019, 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. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-back securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date.

  Weighted
(Dollars are in thousands) Amortized   Fair   Average
Securities Available for Sale Cost   Value   Yield
Due in one year or less $ - $ -   -%
Due after one year through five years 4,710 4,752 2.53%
Due after five years through ten years   13,211   13,295   3.39%
Due after ten years   32,656   32,602   2.42%
Total $ 50,577 $ 50,649   2.68%

 

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities are restricted from trading and are recorded at a cost of $2.6 million and $2.5 million as of December 31, 2019 and 2018, respectively. The stock has no quoted market value and no ready market exists.

 

NOTE 6 LOANS

 

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

       
       
(Dollars are in thousands)  2019  2018
Real estate secured:          
Commercial  $170,436   $140,862 
Construction and land development   31,130    35,119 
Residential 1-4 family   242,922    249,946 
Multifamily   13,638    13,496 
Farmland   20,790    22,114 
Total real estate loans   478,916    461,537 
Commercial   53,994    55,157 
Agriculture   4,797    5,266 
Consumer installment loans   23,127    24,538 
All other loans   1,710    598 
Total loans  $562,544   $547,096 

 

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

 

(Dollars are in thousands)  2019  2018
Real estate secured:          
Commercial  $1,601   $784 
Construction and land development   45    157 
Residential 1-4 family   2,544    3,626 
Multifamily   -    76 
Farmland   531    1,657 
Total real estate loans   4,721    6,300 
Commercial   390    61 
Consumer installment and other loans   45    8 
Total loans receivable on nonaccrual status  $5,156   $6,369 

 

Total interest income not recognized on nonaccrual loans for 2019 and 2018 was $714 thousand and $500 thousand, respectively. In 2019, $4.4 million of non-performing and under-performing real estate loans were sold resulting in $113 thousand of charge-offs and $57 thousand of recoveries processed through the allowance for loan losses. In 2018, four nonperforming or under performing loans totaling $1.9 million were sold to further reduce the level of nonaccrual loans with proceeds of $1.5 million received. Charge offs of $365 thousand associated with these accounts were realized and fully absorbed by the allowance for loan losses during 2018.

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The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2019 and December 31, 2018:

 

 

As of December 31, 2019

(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  $2,017   $100   $2,416   $2,478   $- 
Construction and land development   91    7    70    346    - 
Residential 1-4 family   1,944    55    1,263    1,460    - 
Multifamily   29    1    -    -    - 
Farmland   1,143    47    778    970    - 
Commercial   578    11    128    178    - 
Agriculture   -    -    -    1    - 
Consumer installment loans   2    -    -    -    - 
All other loans   -    -    -    -    - 
With an allowance recorded:                         
Real estate secured:                         
Commercial   470    1    363    379    70 
Construction and land development   -    -    -    -    - 
Residential 1-4 family   302    -    55    60    44 
Multifamily   -    -    -    -    - 
Farmland   221    11    216    228    9 
Commercial   507    7    286    886    200 
Agriculture   -    -