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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
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Commission file number 000-27205
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NORTH CAROLINA 56-2132396
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658
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(Address of Principal Executive Offices) (Zip Code)
(828) 464-5620
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(Registrant's Telephone Number, Including Area Code)
Securities to be Registered Pursuant to Section 12(b) of the Act: NONE
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Securities to be Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. $48,280,710 BASED ON THE CLOSING
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PRICE OF SUCH COMMON STOCK ON MARCH 19, 2001, WHICH WAS $15.00 PER SHARE.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,218,714 SHARES OF COMMON STOCK, OUTSTANDING AT MARCH 19, 2001.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the
year ended December 31, 2000 (the "Annual Report"), which is included as
Appendix A to the Proxy Statement for the 2001 Annual Meeting of Shareholders,
are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders of
Peoples Bancorp of North Carolina, Inc. to be held on May 3, 2001 (the "Proxy
Statement"), are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Peoples Bancorp of North Carolina, Inc. (the "Company"), was formed in 1999
to serve as the holding company for Peoples Bank (the "Bank"). The Company is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Company's sole activity consists of owning
the Bank. The Company's principal source of income is any dividends which are
declared and paid by the Bank on its capital stock.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities. The Bank's deposits are insured by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
amount permitted by law. It is also a member of the Federal Home Loan Bank
system. The Bank conducts its business from its corporate headquarters located
at 518 West C Street, Newton, North Carolina and twelve additional offices in
Lincolnton, Newton, Denver, Triangle, Catawba, Conover, Maiden, Claremont,
Hiddenite, and Hickory, North Carolina. Eleven branch offices provide automated
teller machine (ATM) access to Bank customers. The Bank also has two stand
alone ATMs located in Hickory and in Sherrills Ford. At December 31, 2000, the
Company had total assets of $519 million, net loans of $406.2 million, deposits
of $450.1 million, investment securities of $71.6 million, and shareholders'
equity of $43.0 million.
The Bank is engaged primarily in the business of attracting retail and
commercial deposits from the general public and using those deposits to make
secured and unsecured loans. The Bank offers a full range of loan and deposit
products as well as non-deposit investment products. The Bank makes automobile,
credit card, mobile home, securities, first and second mortgage, boat and
recreational vehicle and deposit secured, as well as unsecured, consumer loans.
The Bank also offers a broad range of secured and unsecured commercial loan
products, including commercial construction/permanent loans, Small Business
Administration loans, Rural Economic and Community Development guaranteed loans,
commercial and standby letters of credit, equipment leasing for businesses and
municipalities, special community development loans, and agricultural loans.
The Bank has a diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable rate
commercial property loans. Commercial loans are spread throughout a variety of
industries with no one particular industry or group of related industries
accounting for a significant portion of the commercial loan portfolio. At
December 31, 2000, approximately 9% of the Bank's portfolio was unsecured.
Unsecured loans generally involve higher credit risk than secured loans, and in
the event of customer default, the Bank has a higher exposure to potential loan
losses. The Bank has sold, servicing retained, approximately 24% of its loan
portfolio.
The majority of the Bank's deposit and loan customers are individuals and
small to medium-sized businesses located in the Bank's market area. Management
does not believe the Bank is dependent on a single customer or group of
customers concentrated in a particular industry whose loss or insolvency would
have a material adverse impact on operations.
The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments, interest-earning deposits in other depository
institutions, and transaction and fee income from lending, deposit and
subsidiary activities. The major expenses of the Bank are interest on deposits
and general and administrative expenses such as employee compensation and
benefits, and occupancy expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Commissioner of Banks (the
"Commissioner"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
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activities are affected by the demand for financing, which in turn are affected
by the interest rates at which financing may be offered and other factors
affecting local demand and availability of funds.
At December 31, 2000, the Bank employed 197 full-time equivalent employees.
The Company has no operations and conducts no business of its own other
than owning the Bank. Accordingly, the discussion of the business which follows
concerns the business conducted by the Bank, unless otherwise indicated.
SUBSIDIARIES
The Bank is the Company's only subsidiary. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Peoples Real Estate and Appraisal
Services, Inc. Through a relationship with Raymond James Financial Services,
Inc., Peoples Investment Services, Inc. provides the Bank's customers access to
investment counseling and non-deposit investment products such as stocks, bonds,
mutual funds, tax deferred annuities, and related brokerage services. Peoples
Real Estate and Appraisal Services, Inc., provides real estate appraisal
services to customers of the Bank.
MARKET AREA
The Bank's primary market consists of the communities in an approximately
25-mile radius around its headquarters office in Newton, North Carolina. This
area includes Catawba County, Alexander County, the western portion of Iredell
County, the northern and central portions of Lincoln County, and portions of
northeast Gaston County. The Bank is located only 40 miles north of Charlotte,
North Carolina and the Bank's primary market area is and will continue to be
significantly affected by its close proximity to this major metropolitan area.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, technology, services
and utilities. Corning Cable Systems, LLC (manufacturer of fiber optic cable
and accessories) is the largest employer in Catawba County. Other major
employers include CommScope, Inc. (manufacturer of fiber optic cable and
accessories), Canteen Vending (food service), Frye Regional Medical Center,
Inc., Century Furniture Company, and Catawba County Schools. Employment in the
Bank's primary market area as of January 2001 was strong, with an unemployment
rate below that of North Carolina and national averages.
COMPETITION
The Bank has operated in the Catawba Valley region for more than 85 years
and is the only financial institution headquartered in Newton. However, the
Bank faces strong competition both in attracting deposits and making loans. Its
most direct competition for deposits has historically come from other commercial
banks, credit unions and brokerage firms located in its primary market area,
including large financial institutions. Two national money center commercial
banks are headquartered in Charlotte, North Carolina, only 40 miles from the
Bank's primary market area. Based upon June 30, 2000 comparative data, the Bank
had 17.7% of the deposits in Catawba County, placing it second in deposit size
among a total of 11 banks with branch offices in Catawba County.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The Bank's deposit base has grown principally due to economic
growth in the Bank's market area coupled with the implementation of new and
competitive deposit products. The ability of the Bank to attract and retain
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for loans from commercial banks and
mortgage banking companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition is increasing as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
SUPERVISION AND REGULATION
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Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
REGULATION OF THE COMPANY.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank. As a bank holding company subject
to the BHCA, the Company is subject to certain regulations of the Federal
Reserve. Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Also, see " - The
Gramm-Leach-Bliley Act". The BHCA prohibits the Company from acquiring direct
or indirect control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank holding company or savings bank holding company
without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto. The BHCA does not place territorial restrictions on the
activities of such non-banking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the Company or controls in any manner
the election of a majority of the directors of the Company. Control is presumed
to exist if a person acquires more than 10% of any class of voting stock and the
stock is registered under Section 12 of the Exchange Act or the acquiror will be
the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the bank's total
assets at the time the bank became undercapitalized or (ii) the amount which is
necessary (or would have been necessary) to bring the bank into compliance with
all acceptable capital standards as of the time the bank fails to comply with
such capital restoration plan. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
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 absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the BIF as a result of the default of
a commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the SAIF or
the BIF or both. The FDIC's claim for damages is superior to claims of
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stockholders of the insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period unless the Company
(i) both before and after the redemption satisfies capital requirements for
"well capitalized" state member banks, (ii) received a one or two rating in its
last examination, and (iii) is not the subject of any unresolved supervisory
issues. As a result of the Company's ownership of the Bank, the Company is
registered under the bank holding company laws of North Carolina. Accordingly,
the Company is also subject to regulation and supervision by the Commissioner.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier I capital," principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less certain goodwill items. The
remainder ("Tier II capital") may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a Tier I
capital (leverage) ratio of at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain requirements and limitations of North Carolina corporate
law, except as set forth in this paragraph, neither the Commissioner nor the
FDIC have promulgated any regulations specifically limiting the right of the
Company to pay dividends and repurchase shares. However, the ability of the
Company to pay dividends or repurchase shares may be dependent upon the
Company's receipt of dividends from the Bank. The Bank's ability to pay
dividends is limited. See " -- Regulation of the Bank -- Dividends."
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act"). As a result of such registration, the proxy and tender offer
rules, insider trading reporting requirements, annual and periodic reporting and
other requirements of the Exchange Act are applicable to the Company.
REGULATION OF THE BANK
Dividends. North Carolina commercial banks, such as the Bank, are subject
to legal limitations on the amounts of dividends they are permitted to pay.
Dividends may be paid by the Bank from undivided profits, which are determined
by deducting and charging certain items against actual profits, including any
contributions to surplus required by North Carolina law. Also, an insured
depository institution, such as the Bank, is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
defined in the applicable law and regulations). Based on its current financial
condition, the Bank does not expect that this provision will have any impact on
the Bank's ability to pay dividends.
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Capital Requirements. The Bank, as a North Carolina commercial bank, is
required to maintain a surplus account equal to 50% or more of its paid-in
capital stock. As a North Carolina chartered, FDIC-insured commercial bank
which is not a member of the Federal Reserve System, the Bank is also subject to
capital requirements imposed by the FDIC. Under the FDIC's regulations, state
nonmember banks that (a) receive the highest rating during the examination
process and (b) are not anticipating or experiencing any significant growth, are
required to maintain a minimum leverage ratio of 3% of total consolidated
assets; all other banks are required to maintain a minimum ratio of 1% or 2%
above the stated minimum, with a minimum leverage ratio of not less than 4%.
The Bank exceeded all applicable capital requirements as of December 31, 2000.
Deposit Insurance Assessments. The Bank is also subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by the BIF members such as the Bank shall be as specified in a schedule
required to be issued by the FDIC. All FDIC deposits for deposit insurance have
an effective rate ranging from 0 to 31 basis points per $100 of insured
deposits, depending on the institution's capital position and other supervisory
factors. Based on the current financial condition and capital levels of the
Bank, the Bank does not expect that the FDIC insurance assessments will have a
material impact on the Bank's future earnings.
Transactions with Affiliates. Under current federal law, depository
institutions are subject to the restrictions contained in Section 22(h) of the
Federal Reserve Act with respect to loans to directors, executive officers and
principal shareholders. Under Section 22(h), loans to directors, executive
officers and shareholders who own more than 10% of a depository institution (18%
in the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the institution's loans-to-one-borrower limit (as discussed below).
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and shareholders who own
more than 10% of an institution, and their respective affiliates, unless such
loans are approved in advance by a majority of the board of directors of the
institution. Any "interested" director may not participate in the voting. The
FDIC has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval is required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, pursuant to Section 22(h), the Federal Reserve requires that loans to
directors, executive officers, and principal shareholders be made on terms
substantially the same as offered in comparable transactions with non-executive
employees of the Bank. The FDIC has imposed additional limits on the amount a
bank can loan to an executive officer.
Loans to One Borrower. The Bank is subject to the Commissioner's loans to
one borrower limits which are substantially the same as those applicable to
national banks. Under these limits, no loans and extensions of credit to any
borrower outstanding at one time and not fully secured by readily marketable
collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of
the bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and unimpaired
surplus.
Limits on Rates Paid on Deposits and Brokered Deposits. Regulations
promulgated by the FDIC place limitations on the ability of insured depository
institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institution's normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew or
roll-over such deposits without restriction, "adequately capitalized" depository
institutions may accept, renew or roll-over such deposits with a waiver from the
FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew, or roll-over
such deposits. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definitions adopted by the FDIC to implement the corrective action
provisions discussed below.
Only a "well capitalized" (as defined in the statute as significantly
exceeding each relevant minimum capital level) depository institutions may
accept brokered deposits without prior regulatory approval. "Adequately
capitalized" banks may accept brokered deposits with a waiver from the FDIC
(subject to certain restrictions on payment of rates), while "undercapitalized"
banks may not accept brokered deposits. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" are the same as the definitions adopted by the agencies to
implement the prompt corrective action provisions discussed below.
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Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 2000, the Bank was in compliance with
this requirement.
Community Reinvestment. Under the Community Reinvestment Act ("CRA") as
implemented by regulations of the FDIC, an insured institution has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop, consistent with the CRA, the types of products and
services that it believes are best suited to its particular community. The CRA
requires the federal banking regulators, in connection with their examinations
of insured institutions, to assess the institutions' records of meeting the
credit needs of their communities, using the ratings of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance," and to take
that record into account in its evaluation of certain applications by those
institutions. All institutions are required to make public disclosure of their
CRA performance ratings. The Bank received a "satisfactory" rating in its last
CRA examination which was conducted during June 2000.
Prompt Corrective Action. The FDIC has broad powers to take corrective
action to resolve the problems of insured depository institutions. The extent
of these powers will depend upon whether the institutions in question are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." Under the regulations, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I
risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or
greater (or 3% or greater in the case of an institution with the highest
examination rating). An institution is considered (A) "undercapitalized" if it
has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I
risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than
4% (or 3% in the case of an institution with the highest examination rating);
(B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
The Gramm-Leach-Bliley Act.
The Gramm-Leach-Bliley Act (the "GLB Act") was signed into law on November
12, 1999 to remove barriers separating banking, securities and insurance firms
and to make other reforms. Certain provisions of the GLB Act were effective
immediately upon signing; other provisions generally take effect between 120
days and 18 months following enactment.
Financial Affiliations. Title I of the GLB Act facilitates affiliations
among banks, securities firms and insurance companies. Financial organizations
may structure new financial affiliations through a holding company structure, or
a financial subsidiary (with limitations on activities and appropriate
safeguards). A bank holding company may now qualify as a financial holding
company and expand into a wide variety of services that are financial in nature,
provided that its subsidiary depository institutions are well-managed,
well-capitalized and have received a "satisfactory" rating on their last
Community Reinvestment Act (the "CRA") examination. A bank holding company
which does not qualify as a financial holding company under the GLB Act is
generally limited in the types of activities in which it may engage to those
that the Federal Reserve had recognized as permissible for a bank holding
company prior to the date of enactment of the GLB Act.
National banks remain limited in the scope of activities they may exercise
directly within the bank, but an eligible national bank may have a financial
subsidiary that exercises many of the expanded financial services authorized for
a financial holding company. A national bank cannot engage in merchant banking
either directly or through a subsidiary, but a financial holding company is
authorized to have an affiliate company that engages in merchant banking.
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State banks may have financial subsidiaries that, upon meeting eligibility
criteria, can engage in activities permitted for financial subsidiaries of
national banks.
Functional Regulation. The GLB Act designates the Federal Reserve as the
overall umbrella supervisor of the new financial services holding companies.
The GLB Act adopts a system of functional regulation where the primary regulator
is determined by the nature of activity rather than the type of institution.
Under this principle, securities activities are regulated by the SEC and other
securities regulators, insurance activities by the state insurance authorities,
and banking activities by the appropriate banking regulator.
Insurance. The GLB Act reaffirms that states are the regulators for
insurance activities of all persons, including acting as the functional
regulator for the insurance activities of federally-chartered banks. However,
states may not prevent depository institutions and their affiliates from
conducting insurance activities.
Privacy. The GLB Act imposes restrictions on the ability of financial
services firms to share customer information with nonaffiliated third parties.
The GLB Act: (i) requires financial services firms to establish privacy policies
and disclose them annually to customers, explaining how nonpublic personal
information is shared with affiliates and third parties; (ii) directs regulatory
agencies to adopt standards for sharing customer information; (iii) permits
customers to prohibit ("opt-out") of the disclosure of personal information to
nonaffiliated third parties; (iv) prohibits the sharing with marketers of credit
card and other account numbers; and, (v) prohibits "pretext" calling. The
privacy provisions do allow, however, a community bank to share information
with third parties that sell financial products, such as insurance companies or
securities firms. The privacy provisions became effective November 2000, with
full compliance required by July 1, 2001.
Other. The GLB Act reforms the Federal Home Loan Bank System to provide
small banks with greater access to funds for making loans to small business and
small farmers. Also, the GLB Act obligates operators of automated teller
machines ("ATMs") to provide notices to customers regarding surcharge practices.
The GLB Act provides that CRA agreements between financial institutions and
community groups must be disclosed and reported to the public.
Other. The federal banking agencies, including the FDIC, have developed
joint regulations requiring disclosure of contingent assets and liabilities and,
to the extent feasible and practicable, supplemental disclosure of the estimated
fair market value of assets and liabilities. Additional joint regulations
require annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small,
well-capitalized institutions and state chartered institutions examined by state
regulators, and establish operational and managerial, asset quality, earnings
and stock valuation standards for insured depository institutions, as well as
compensation standards where such compensation would endanger the insured
depository institution or would constitute an unsafe practice.
The Bank is subject to examination by the FDIC and the Commissioner. In
addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit and equal credit, fair credit reporting laws and laws relating to branch
banking. The Bank, as an insured North Carolina commercial bank, is prohibited
from engaging as a principal in activities that are not permitted for national
banks, unless (i) the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and (ii) the Bank is,
and continues to be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital
stock of a North Carolina commercial bank is impaired by losses or otherwise,
the Commissioner is authorized to require payment of the deficiency by
assessment upon the bank's shareholders, pro rata, and to the extent necessary,
if any such assessment is not paid by any shareholder, upon 30 days notice, to
sell as much as is necessary of the stock of such shareholder to make good the
deficiency.
The Bank does not believe that these regulations have had or will have a
material adverse effect on its current operations.
Taxation.
9
Federal Income Taxation. Financial institutions such as the Bank are
subject to the provisions of the Internal Revenue Code of 1986, as amended (the
"Code") in the same general manner as other corporations. However, banks which
meet cetain definitional tests and other conditions prescribed by the Code may
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The Bank may
compute its addition to the bad debt reserve under the specific charge-off
method or the reserve method. Under the reserve method, the addition to bad
debts from losses on loans is computed by use of the experience method. Use of
the experience method requires minimum additions to the reserve based on the
amount allowable under a six-year moving average. The Code also provides annual
limits on the amount the Bank can add to its reserves for loan losses.
State Taxation. Under North Carolina LAW, the Bank is subject to corporate
Income taxes at a 6.90% rate and an annual franchise tax at a rate of 0.15%.
Future Requirements. Statutes and regulations which contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of financial institutions are introduced regularly. The Bank cannot predict
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Bank may be affected by such statute or
regulation.
ITEM 2. PROPERTIES
At December 31, 2000, the Bank conducted its business from the headquarters
office in Newton, North Carolina, and its twelve other branch offices in
Lincolnton, Hickory, Newton, Catawba, Conover, Claremont, Maiden, Denver,
Triangle and Hiddenite, North Carolina. The Bank also has two stand alone ATMs
located in Hickory and Sherrills Ford. The following table sets forth certain
information regarding the Bank's properties at December 31, 2000. Unless
indicated otherwise, all properties are owned by the Bank.
10
Corporate Office 2050 Catawba Valley Boulevard
518 West C Street Hickory, North Carolina 28601
Newton, North Carolina 28658 (ATM site only)
420 West A Street
Newton, North Carolina 28658
2619 North Main Avenue
Newton, North Carolina 28613 LEASED
------
213 1st Street, West 1333 2nd Street NE
Conover, North Carolina 28613 Hickory, North Carolina 28601
3261 East Main Street 218 South main Avenue
Claremont, North Carolina 28037 Newton, North Carolina 28658
6125 Highway 16 South 105 A South Main Avenue
Denver, North Carolina 28037 Newton, North Carolina 28658
(lease terminated on January 15, 2001)
5153 N.C. Highway 90E
Hiddenite, North Carolina 28636 6360 East N.C. Highway
Sherrills Ford, North Carolina 28673
200 Island Ford Road (ATM site only)
Maiden, North Carolina 28650
3310 Springs Road NE
Hickory, North Carolina 28601
142 South Highway 16
Denver, North Carolina 28037
106 North Main Street
Catawba, North Carolina 28609
1910 East Main Street
Lincolnton, North Carolina 28092
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, the Bank is not involved in any pending legal
proceedings other than routine, non-material proceedings occurring in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Bank's shareholders during the
quarter ended December 31, 2000.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this Item is set forth under the section
captioned "Market for the Company's Common Equity and Related Shareholder
Matters" on page A-16 of the Annual Report, which section is incorporated herein
by reference. See "Item 1. BUSINESS--Supervision and Regulation--The Company"
above for regulatory restrictions which limit the ability of the Company to pay
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page A-3 of the Annual Report, which table is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages A-4 through A-14 of the Annual Report, which section is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section captioned
"Quantitative and Qualitative Disclosures About Market Risk" on page A-15 of the
Annual Report, which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages A-19 through A-40 of the Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on pages 5 and 6 of the Proxy Statement and
"Proposal 1 - Election of Directors - Executive Officers" on page 8 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 5 of the Proxy Statement, which section is incorporated herein by
reference.
12
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Director Compensation" on pages
7 and 8 and "- Management Compensation," " - Stock Benefit Plan," "- Employment
Agreements," "- Incentive Compensation Plans," "- Profit Sharing and 401(k)
Plans," and "- Discretionary Bonuses and Service Awards," on pages 9 through19
of the Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 4 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors -
Indebtedness of and Transactions with Management" on page 19 of the Proxy
Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in the Annual
Report attached hereto as Exhibit (13) and incorporated herein
by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999
(c) Consolidated Statements of Earnings for the Years
Ended December 31, 2000, 1999 and 1998
(d) Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998
(e) Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 2000, 1999 and 1998
(f) Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998
(g) Notes to Consolidated Financial Statements
14(a)2. Financial Consolidated Statement Schedules
All schedules have been omitted as the required information
is either inapplicable or included in the Notes to
Consolidated Financial Statements.
14(a)3. Exhibits
Exhibit (3)(i) Articles of Incorporation of Peoples
Bancorp of North Carolina, Inc., incorporated
by reference to Exhibit (3)(I) to the Form 8-A
filed with the Securities and Exchange
Commission on September 2, 1999
Exhibit (3)(ii) Bylaws of Peoples Bancorp of North
Carolina, Inc. incorporated by reference to
Exhibit (3)(II) to the Form 8-A filed with the
Securities and Exchange Commission on
September 2, 1999
13
Exhibit (4) Specimen Stock Certificate, incorporated by
reference to Exhibit (4) to the Form 8-A filed
with the Securities and Exchange Commission on
September 2, 1999
Exhibit (10)(a) Employment Agreement between Peoples Bank and
Tony W. Wolfe incorporated by reference to
Exhibit (10)(a) to the Form 10-K filed with
the Securities and Exchange Commission on
March 30, 2000
Exhibit (10)(b) Employment Agreement between Peoples Bank and
Joseph F. Beaman, Jr. incorporated by
reference to Exhibit (10)(b) to the Form 10-K
filed with the Securities and Exchange
Commission on March 30, 2000
Exhibit (10)(c) Employment Agreement between Peoples Bank and
Clifton A. Wike incorporated by reference to
Exhibit (10)(c) to the Form 10-K filed with
the Securities and Exchange Commission on
March 30, 2000
Exhibit (10)(d) Employment Agreement between Peoples Bank and
William D. Cable incorporated by reference to
Exhibit (10)(d) to the Form 10-K filed with
the Securities and Exchange Commission on
March 30, 2000
Exhibit (10)(e) Employment Agreement between Peoples Bank and
Lance A. Sellers incorporated by reference to
Exhibit (10)(e) to the Form 10-K filed with
the Securities and Exchange Commission on
March 30, 2000
Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc.
Omnibus Stock Ownership and Long Term
Incentive Plan incorporated by reference to
Exhibit (10)(f) to the Form 10-K filed
with the Securities and Exchange Commission
on March 30, 2000
Exhibit (11) Statement regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 2000 Annual Report of Peoples Bancorp of
North Carolina, Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North
Carolina, Inc.
Exhibit (23)(a) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on
August 10, 2000.
Exhibit (23)(b) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on
September 28, 2000.
14(b) The Company filed no reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 2000.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Peoples Bancorp of North Carolina, Inc.
(Registrant)
By: /s/ Tony W. Wolfe
---------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
Date: March 28, 2001
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
- ----------------------------- --------------------------------------------- ---------------
/s/ Tony W. Wolfe President and Chief Executive Officer March 28, 2001
- ----------------------------- ---------------
Tony W. Wolfe (Principal Executive Officer)
/s/ Robert C. Abernethy Chairman of the Board and Director March 28, 2001
- ----------------------------- ---------------
Robert C. Abernethy
/s/ Joseph F. Beaman, Jr. Executive Vice President and Chief Financial March 28, 2001
- ----------------------------- ---------------
Joseph F. Beaman, Jr. Officer (Principal Financial and
Principal Accounting Officer)
/s/ James S. Abernethy Director March 28, 2001
- ----------------------------- ---------------
James S. Abernethy
/s/ Bruce R. Eckard Director March 28, 2001
- ----------------------------- ---------------
Bruce R. Eckard
/s/ John H. Elmore, Jr. Director March 28, 2001
- ----------------------------- ---------------
John H. Elmore, Jr.
/s/ Charles F. Murray Director March 28, 2001
- ----------------------------- ---------------
Charles F. Murray
/s/ Bobby E. Matthews Director March 28, 2001
- ----------------------------- ---------------
Bobby E. Matthews
/s/ Larry E. Robinson Director March 28, 2001
- ----------------------------- ---------------
Larry E. Robinson
/s/ Fred L. Sherrill, Jr. Director March 28, 2001
- ----------------------------- ---------------
Fred L. Sherrill, Jr.
/s/ Dan Ray Timmerman, Sr. Director March 28, 2001
- ----------------------------- ---------------
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary Director March 28, 2001
- ----------------------------- ---------------
Benjamin I. Zachary
15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------------ ---------------
Exhibit (11) Statement Regarding Computation of Per Share Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 2000 Annual Report of Peoples Bancorp of North Carolina, Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North Carolina, Inc.
Exhibit (23)(a) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on
August 10, 2000.
Exhibit (23)(b) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on
September 28, 2000.
16
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Basic earnings per common share of $1.67 for the year ended December 31,
2000 was calculated by dividing net income of $5.4 million for the period
January 1, 2000 to December 31, 2000 by the weighted-average number of common
shares outstanding of 3,218,714.
17
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 6
represent average daily balances.
18
SUBSIDIARIES OF PEOPLES BANCORP OF NORTH CAROLINA, INC.
Peoples Bancorp of North Carolina, Inc. has one subsidiary, Peoples Bank, a
commercial bank organized under the laws of North Carolina.
19
APPENDIX A
PEOPLES BANCORP OF NORTH CAROLINA, INC.
GENERAL DESCRIPTION OF BUSINESS
Peoples Bancorp of North Carolina, Inc. (the "Company"), was formed in 1999
to serve as the holding company for Peoples Bank (the "Bank"). The Company is a
bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHCA"). The Company's sole activity consists of owning
the Bank. The Company's principal source of income is any dividends which are
declared and paid by the Bank on its capital stock.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities. The Bank's deposits are insured by the Bank Insurance Fund (the
"BIF") of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
amount permitted by law. It is also a member of the Federal Home Loan Bank
system. The Bank conducts its business from its corporate headquarters located
at 518 West C Street, Newton, North Carolina and twelve additional offices in
Lincolnton, Newton, Denver, Triangle, Catawba, Conover, Maiden, Claremont,
Hiddenite, and Hickory, North Carolina. Eleven branch offices provide automated
teller machine (ATM) access to Bank customers. The Bank also has two stand
alone ATMs located in Hickory and in Sherrills Ford. At December 31, 2000, the
Company had total assets of $519.0 million, net loans of $406.2 million,
deposits of $450.1 million, investment securities of $71.6 million, and
shareholders' equity of $43.0 million.
The Bank is engaged primarily in the business of attracting retail and
commercial deposits from the general public and using those deposits to make
secured and unsecured loans. The Bank offers a full range of loan and deposit
products as well as non-deposit investment products. The Bank makes automobile,
credit card, mobile home, securities, first and second mortgage, boat and
recreational vehicle and deposit secured, as well as unsecured, consumer loans.
The Bank also offers a broad range of secured and unsecured commercial loan
products, including commercial construction/permanent loans, Small Business
Administration loans, Rural Economic and Community Development guaranteed loans,
commercial and standby letters of credit, equipment leasing for businesses and
municipalities, special community development loans, and agricultural loans.
The Bank has a diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable rate
commercial property loans. Commercial loans are spread throughout a variety of
industries with no one particular industry or group of related industries
accounting for a significant portion of the commercial loan portfolio. At
December 31, 2000, approximately 9% of the Bank's portfolio was unsecured.
Unsecured loans generally involve higher credit risk than secured loans, and in
the event of customer default, the Bank has a higher exposure to potential loan
losses. The Bank has sold, servicing retained, approximately 24% of its loan
portfolio.
The majority of the Bank's deposit and loan customers are individuals and
small to medium-sized businesses located in the Bank's market area. Management
does not believe the Bank is dependent on a single customer or group of
customers concentrated in a particular industry whose loss or insolvency would
have a material adverse impact on operations.
The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments, interest-earning deposits in other depository
institutions, and transaction and fee income from lending, deposit and
subsidiary activities. The major expenses of the Bank are interest on deposits
and general and administrative expenses such as employee compensation and
benefits, and occupancy expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Commissioner of Banks (the
"Commissioner"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing, which in turn are affected
by the interest rates at which financing may be offered and other factors
affecting local demand and availability of funds.
The Bank is the Company's only subsidiary. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Peoples Real Estate and Appraisal
Services, Inc. Through a relationship with Raymond James Financial Services,
Inc., Peoples Investment Services, Inc. provides the Bank's customers access to
investment counseling and non-deposit investment products such as stocks, bonds,
mutual funds, tax deferred annuities, and related brokerage services. Peoples
Real Estate and Appraisal Services, Inc., provides real estate appraisal
services to customers of the Bank.
A-1
This Annual Report contains forward-looking statements. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those anticipated in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
changes in the interest rate environment, management's business strategy,
national, regional and local market conditions and legislative and regulatory
conditions.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission.
A-2
SELECTED
FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
2000 1999 1998 1997 1996
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Interest income $ 40,859 32,302 29,215 23,783 18,956
Interest expense 19,432 14,790 14,540 11,179 8,586
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
Net interest income 21,427 17,512 14,675 12,604 10,370
Provision for loan losses 1,879 425 445 696 980
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 19,548 17,087 14,230 11,908 9,390
Non-interest income 3,915 3,380 3,646 2,060 1,475
Non-interest expense 15,509 13,832 12,020 10,413 8,118
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
Income before taxes 7,954 6,635 5,856 3,555 2,747
Income taxes 2,576 2,093 1,847 1,149 722
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
Net income $ 5,378 4,542 4,009 2,406 2,025
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
SELECTED YEAR-END BALANCES
Assets $ 519,002 432,435 402,273 326,853 257,467
Available for sale securities 71,565 62,498 63,228 53,307 56,995
Loans 407,790 336,959 306,748 238,449 179,304
Interest-earning assets 490,449 411,734 383,270 308,852 244,038
Deposits 450,073 376,634 350,067 275,393 231,346
Interest-bearing liabilities 420,594 339,243 315,387 258,685 197,255
Shareholders' equity $ 43,039 37,998 35,924 24,930 22,911
Shares outstanding* 3,218,714 3,218,950 3,219,150 2,808,300 2,808,300
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
SELECTED AVERAGE BALANCES
Assets $ 469,536 417,387 369,864 295,879 243,094
Available for sale securities 66,218 60,642 59,824 57,508 53,294
Loans 374,226 324,651 271,819 215,789 164,865
Interest-earning assets 447,645 396,606 351,730 281,215 229,631
Deposits 408,210 363,637 321,371 252,998 216,052
Interest-bearing liabilities 373,167 326,164 293,631 233,901 186,101
Shareholders' equity $ 42,852 39,348 33,303 24,117 22,478
Shares outstanding* 3,218,714 3,218,950 3,058,160 2,808,300 2,808,300
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
PROFITABILITY RATIOS
Return on average total assets 1.15% 1.09% 1.08% 0.81% 0.83%
Return on average shareholders' equity 12.55% 11.54% 12.04% 9.98% 9.01%
Dividend payout ratio 23.39% 23.84% 22.61% 33.18% 36.67%
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loan to deposit 91.67% 89.28% 84.58% 85.29% 76.31%
Shareholders' equity to total assets 9.13% 9.43% 9.00% 8.15% 9.25%
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK*
Net income $ 1.67 1.41 1.31 0.86 0.72
Cash dividends $ 0.39 0.34 0.28 0.28 0.26
Book value $ 13.37 11.81 11.16 8.88 8.16
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
*Shares outstanding and per share computations have been restated to reflect a 10% stock dividend during second quarter 2000,
the 3 for 2 stock split during first quarter 1999 and the 10% stock dividend during second quarter 1997.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of earnings and related data are
presented to assist in understanding the consolidated financial condition and
results of operations of Peoples Bancorp of North Carolina, Inc. (the
"Company"), for the years ended December 31, 2000, 1999 and 1998. The Company is
a registered bank holding company operating under the supervision of the Federal
Reserve Board and the parent company of Peoples Bank (the "Bank"). The Bank is a
North Carolina-chartered bank, with offices in Catawba, Lincoln and Alexander
Counties, operating under the banking laws of North Carolina and the Rules and
Regulations of the Federal Deposit Insurance Corporation (the "FDIC").
This discussion and related financial data should be read in conjunction
with the audited consolidated financial statements and related footnotes.
RESULTS OF OPERATIONS
SUMMARY
The Company reported earnings of $5.4 million in 2000, or $1.67 basic
income per share, an 18% increase as compared to $4.5 million, or $1.41 basic
income per share, for 1999. Net income for 1999 represented an increase of 13%
as compared to 1998 net income of $4.0 million. The growth in net income in 2000
is attributable to an increase in net interest income coupled with an increase
in non-interest income. These increases were partially offset by growth in
non-interest expense during 2000. The increase in net income in 1999 compared to
1998 resulted from increased net interest income partially offset by a decrease
in non-interest income and an increase in non-interest expense.
Return on average assets in 2000 was 1.15%, compared to 1.09% in 1999 and
1.08% in 1998. Return on average shareholders' equity was 12.55% in 2000
compared to 11.54% in 1999 and 12.04% in 1998.
NET INTEREST INCOME
Net interest income, the largest component of the Company's income, is the
amount by which interest and fees generated by earning assets exceed the total
cost of funds used to carry them. Net interest income is affected by changes in
the volume and mix of earning assets and interest bearing liabilities, as well
as changes in the yields earned and rates paid. Net interest margin is
calculated by dividing tax-equivalent net interest income by average earning
assets, and represents the Company's net yield on its earning assets.
Net interest income on a tax-equivalent basis totaled $21.9 million in
2000, an increase of 22% or $3.9 million over the comparable figure in 1999. The
increase in net interest income on a tax equivalent basis in 1999 over 1998 was
$2.9 million or 19%. The interest rate spread, which represents the rate earned
on interest earning assets less the rate paid on interest bearing liabilities,
increased to 4.03% in 2000 from 3.74% in 1999, following an increase from the
1998 net interest spread of 3.49%. The net yield on earning assets increased to
4.90% in 2000 from 4.54% in 1999, following an increase from the 1998 net
interest margin of 4.30%.
A-4
Table 1 sets forth for each category of earning assets and interest-bearing
liabilities, the average amounts outstanding, the interest incurred on such
amounts and the average rate earned or incurred for the years ended December 31,
2000, 1999 and 1998. The table also sets forth the average rate earned on total
earning assets, the average rate paid on total interest-bearing liabilities, and
the net yield on average total earning assets for the same periods. Nonaccrual
loans and the interest income that was recorded on these loans, if any, are
included in the yield calculations for loans in all periods reported.
TABLE 1- AVERAGE BALANCE TABLE
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
AVERAGE YIELD / AVERAGE YIELD / AVERAGE YIELD /
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans: Net of unearned income $374,226 $ 36,424 9.73% $324,651 $ 28,375 8.74% $271,819 $ 24,885 9.16%
Investments - taxable 44,320 2,994 6.76% 39,122 2,348 6.00% 40,434 2,322 5.74%
Investments - nontaxable 21,898 1,497 6.84% 21,520 1,475 6.86% 19,390 1,335 6.88%
Federal funds sold 4,593 282 6.14% 6,780 339 5.00% 5,950 323 5.43%
Other 2,608 171 6.56% 4,533 266 5.87% 14,137 804 5.69%
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 447,645 41,368 9.24% 396,606 32,803 8.27% 351,730 29,669 8.44%
Cash and due from banks 11,538 10,667 9,677
Other assets 14,199 14,192 13,053
Allowance for loan losses (4,281) (4,079) (4,596)
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $469,101 $417,386 $369,864
=================================================================================================================================
Interest bearing liabilities:
Deposits:
NOW accounts $ 32,866 $ 456 1.39% $ 31,003 $ 429 1.38% $ 27,642 $ 547 1.98%
Regular savings accounts 24,982 472 1.89% 26,258 490 1.87% 26,302 625 2.37%
Insured money market accounts 55,982 2,832 5.06% 54,757 2,435 4.45% 37,264 1,848 4.96%
Certificates of
deposit $100,000 or more 108,130 6,729 6.22% 83,845 4,475 5.34% 72,628 2,993 4.12%
Other time deposits 133,419 7,838 5.87% 115,786 6,178 5.34% 113,597 7,603 6.69%
FHLB borrowings 15,806 974 6.16% 13,532 736 5.44% 15,277 875 5.73%
Demand notes
payable to U.S. Treasury 852 55 6.46% 899 41 4.56% 898 47 5.23%
Other 1,130 76 6.73% 83 5 5.95% 23 2 8.70%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 373,167 19,432 5.21% 326,163 14,789 4.53% 293,631 14,540 4.95%
Demand deposits 52,831 51,988 43,938
Other liabilities 3,268 2,166 1,088
Shareholder's equity 42,208 39,348 33,303
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholder's equity $471,474 $419,665 $371,960
=================================================================================================================================
Net interest spread $ 21,936 4.03% $ 18,014 3.74% $ 15,129 3.49%
=================================================================================================================================
Net yield on earning assets 4.90% 4.54% 4.30%
=================================================================================================================================
Taxable equivalent adjustment
Investment securities 509 502 454
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 21,427 $ 17,512 $ 14,675
- ---------------------------------------------------------------------------------------------------------------------------------
A-5
Changes in interest income and interest expense can result from variances in
both volume and rates. Table 2 describes the impact on the Company's tax
equivalent net interest income resulting from changes in average balances and
average rates for the periods indicated. The changes in interest due to both
volume and rate have been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the changes in each.
TABLE 2 - RATE/VOLUME VARIANCE ANALYSIS
TAX EQUIVALENT BASIS
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------------------- ---------------------------------------
CHANGES IN CHANGES IN TOTAL CHANGES IN CHANGES IN TOTAL
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
(DOLLARS IN THOUSANDS) VOLUME RATES (DECREASE) VOLUME RATES (DECREASE)
- -------------------------------------------------------------------------- ---------------------------------------
Interest Income:
Loans: Net of unearned income $ 4,579 $ 3,470 $ 8,049 $ 4,724 ($1,234) $ 3,490
Investments - taxable 331 315 646 (77) 103 26
Investments - nontaxable 26 (4) 22 146 (6) 140
Federal funds sold (122) 65 (57) 43 (27) 16
Other (108) 13 (95) (512) (26) (538)
--------------------------------------- ---------------------------------------
Total interest income $ 4,706 $ 3,859 $ 8,565 $ 4,324 ($1,190) $ 3,134
Interest bearing liabilities:
Deposits:
NOW accounts 26 1 27 57 (174) (117)
Regular savings accounts (24) 6 (18) (1) (134) (135)
Insured money market accounts 58 338 396 823 (236) 587
Certificates of
deposit $100,000 or more 1,404 850 2,254 530 952 1,482
Other time deposits 988 672 1,660 132 (1,557) (1,425)
FHLB Borrowings 132 106 238 (95) (44) (139)
Demand notes
payable to U.S. Treasury (3) 17 14 - (6) (6)
Other 66 6 72 3 - 3
--------------------------------------- ---------------------------------------
Total interest expense $ 2,647 $ 1,996 $ 4,643 $ 1,449 ($1,199) $ 250
--------------------------------------- ---------------------------------------
Net interest income $ 2,059 $ 1,863 $ 3,922 $ 2,875 $ 9 $ 2,884
The increase in net interest income in 2000 was primarily attributable to
an increase in the volume of loans coupled with an increase in the yield on
loans. The yield on earning assets increased to 9.24% in 2000 from 8.27% in
1999. This increase reflects an increase in the Company's average prime
commercial lending rate in 2000, when compared to 1999. The average balance of
earning assets increased by $51.0 million, to $447.6 million in 2000 from $396.6
million in 1999. The increase in average loans comprised $49.6 million of this
increase. Average interest-bearing liabilities increased by $47.0 million, to
$373.2 million in 2000 from $326.2 million in 1999. This growth in average
interest-bearing liabilities is a direct result of the increase in average
interest bearing deposits, which increased by $43.7 million, to $355.4 million
in 2000 from $311.7 million in 1999. The increase in average interest bearing
deposits was primarily attributable to the growth in average time deposits,
which increased $41.9 million to $241.5 million in 2000 from $199.6 million in
1999. The cost of funds increased from 4.53% in 1999 to 5.21% in 2000, mainly as
a result of the increase in the cost of deposits. The increase in net interest
margin in 2000 is primarily attributable to the increase in volume of average
interest earning assets, combined with an increase in the average yield earned
on interest earning assets.
Tax-equivalent interest income on loans in 2000 increased $8.0 million or
28% from the $28.4 million recorded for 1999, following an increase of $3.5
million or 14% in 1999 over 1998. This increase was due to a $49.6 million
increase in average loans outstanding in 2000 compared to 1999, combined with a
higher tax-equivalent yield on loans of 9.73% in 2000 compared to 8.74% in 1999.
The increase in the net interest spread to 4.03% in 2000 from 3.74% in 1999
resulted from the increase in the yield on earning assets to 9.24% in 2000 from
8.27% in 1999, partially offset by an increase in the cost of funds to 5.21% in
2000 from 4.53% in 1999.
Interest expense on Federal Home Loan Bank (the "FHLB") borrowings totaled
approximately $974,000 during 2000 at an average rate of 6.16% compared to
approximately $736,000 in 1999 at an average rate of 5.44%, and approximately
$875,000 in 1998 at an average rate of 5.73%. Interest expense on federal funds
purchased, promissory notes and demand notes payable to the U.S. Treasury
totaled approximately $131,000, $46,000 and $49,000 for 2000, 1999 and 1998,
respectively.
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to income in order to bring the
total allowance for loan losses to a level deemed appropriate by management of
the Company based on such factors as management's judgment as to losses within
the Company's loan portfolio, loan growth, net charge-offs, changes in the
composition of the loan portfolio, delinquencies and management's assessment of
the quality of the loan portfolio and general economic climate.
A-6
The provision for loan losses was $1,879,000, $425,000, and $445,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The increase in
the provision for loan losses reflects management's decision to accelerate the
Bank's contribution to the allowance for loan losses as a cautionary approach to
address any possibility of an economic downturn in the regional economy. This
contribution will also serve to better align the Bank among its peers with
respect to the ratio of allowance for loan losses as a percent of total loans
outstanding. The ratio of net charge-offs to average loans was 0.29% in 2000,
0.20% in 1999 and 0.25% in 1998. Net charge-offs for 2000 were $1.1 million.
The ratio of non-performing loans to total loans was 1.45% at December 31, 2000,
as compared to 1.03% and 1.20% at December 31, 1999 and 1998, respectively.
NON-INTEREST INCOME
Non-interest income for 2000 totaled $3.9 million, an increase of $536,000
or 16% from non-interest income of $3.4 million for 1999. The increase in
non-interest income for 2000 resulted from an increase in service charges, fees
and miscellaneous other income. Non-interest income for 1999 decreased $266,000
or 7% over non-interest income of $3.7 million for 1998 primarily due to a
reduction in mortgage banking income resulting from a decline in mortgage loan
applications due to higher mortgage interest rates.
Miscellaneous other income increased 121% to $2.0 million compared to
approximately $920,000 in 1999. The increase in miscellaneous other income is
primarily attributable to the sale of the Company's Peoples Bank Newton Main
Office to the United States Postal Service. This transaction resulted in a net
gain on the sale of capital assets that has enabled the Company to improve
future earnings by realizing short-term losses on the sale of certain available
for sale securities and certain jumbo mortgage loans. The Company sold $18.1
million of available for sale securities at a loss of approximately $483,000
compared to a loss on sale of securities of approximately $35,000 during 1999.
During 1998 a gain of sale of securities of approximately $168,000 was
recognized. Proceeds from the sale of securities in 2000 were reinvested in
higher yielding available for sale securities. Also sold were $5.7 million of
jumbo mortgage loans at a loss of approximately $284,000. These proceeds will be
reinvested in higher yielding loans.
Service charge income increased $262,000, or 20% from 1999 to 2000, as a
result of an increase in deposit volume and associated charges. Increases in
non-interest income for 1999 were attributable to an increase in deposit volume
and associated charges. Service charge income increased $140,000, or 12% in 1999
compared to 1998.
NON-INTEREST EXPENSE
Total non-interest expense for 2000 amounted to $15.5 million. This was a
12% increase over the $13.8 million reported in 1999, and followed a 15%
increase in 1999 over the $12.0 million reported in 1998.
Salary and employee benefit expense was $8.9 million in 2000, compared to
$7.7 million during 1999, an increase of $1.2 million or 15%, following a $1.3
million or 20% increase in salary and employee benefit expense in 1999 over
1998. The increase during 2000 resulted from merit increases, additional
participation in management and employee incentive plans, and increased staffing
levels to support overall Company growth. Increases during 1999 reflect merit
increases and the cost of additional personnel to staff two new branches.
The Company recorded occupancy expense of $2.5 million in 2000, compared to
$2.2 million during 1999, an increase of $279,000 or 13%, following $275,000 or
14% increase in occupancy expenses in 1999 over 1998. The increase in 2000
reflects the construction of two full service branches and renovations
associated with the Company's new corporate headquarters. Increases in
occupancy expense in 1999 over 1998 were due to additional leased properties
associated with Company growth, an increase in property tax rates during 1999
and a full year of depreciation expense on a teller platform and wide area
network implemented in 1998.
The total of all other operating expenses increased $236,000 or 4% during
2000. Other operating expense increased $153,000 or 6% in 1999 over 1998.
INCOME TAXES
Total income tax expense was $2.6 million in 2000 compared with $2.1
million in 1999 and $1.8 million in 1998. The primary reason for the increase
in taxes was the increase in pretax income. The Company's effective tax rates
were 32.39%, 31.55% and 31.53% in 2000, 1999 and 1998, respectively.
LIQUIDITY
The Bank's liquidity position is generally determined by the need to respond to
short term demand for funds created by deposit withdrawals and the need to
provide resources to fund assets, typically in the form of loans. How the Bank
responds to these needs is affected by the Bank's ability to attract deposits,
the maturity of the loans and securities, the flexibility of assets within the
securities portfolio, the current earnings of the Bank, and the ability to
borrow funds from other sources. The Bank's primary sources of liquidity are
cash and cash equivalents, available-for-sale securities, deposit growth, and
the cash flows from principal and interest payments on loans
A-7
and other earning assets. In addition, the Bank is able, on a short-term basis,
to borrow funds from the Federal Reserve System, the Federal Home Loan Bank of
Atlanta and The Banker's Bank, and is also able to purchase federal funds from
other financial institutions. At December 31, 2000 the Bank had a line of credit
with the FHLB equal to 20% of the Bank's total assets, with an outstanding
balance of $21.4 million. The Bank also has the ability to borrow up to $10
million through The Bankers Bank. The liquidity ratio for the Bank, which is
defined as net cash, interest bearing deposits with banks, Federal Funds sold,
certain investment securities and certain FHLB advances, as a percentage of net
deposits (adjusted for deposit runoff projections) and short-term liabilities
was 27.03% at December 31, 2000, 30.26% at December 31, 1999, and 26.49% at
December 31, 1998. The December 31, 1999 and 1998 ratio has been restated to
reflect increased borrowing capacity at the FHLB, which the Bank recognizes as a
factor of its liquidity.
As disclosed in the Company's Consolidated Statements of Cash Flows
included elsewhere herein, net cash provided by operating activities was
approximately $8.7 million during 2000. Net cash used in investing activities
of $86.1 million consisted primarily of a net change in loans of $72.9 million
and securities purchased of $33.3 million funded largely by sales, maturities
and paydowns of investment securities of $25.3 million. These changes resulted
from management's continued efforts to reinvest new funds in higher-yielding
loans rather than investment securities. Net cash provided by financing
activities consisted primarily of a $73.4 million net increase in deposits.
ASSET LIABILITY MANAGEMENT
The Company's asset liability management strategies are designed to
minimize interest rate risk between interest-earning assets and interest-bearing
liabilities at various maturities, while maintaining the objective of assuring
adequate liquidity and maximizing net interest income. Table 3 presents an
interest rate sensitivity analysis for the interest earning assets and
interest-bearing liabilities for the year ended December 31, 2000.
TABLE 3 - INTEREST SENSITIVITY ANALYSIS
OVER 5 YEARS
(DOLLARS IN THOUSANDS) IMMEDIATE 1-3 MONTHS 4-12 MONTHS 1 - 5 YEARS & NON-SENSITIVE TOTAL
==================================================================================================================================
EARNING ASSETS:
Loans $ 271,465 $ 10,053 $ 20,710 $ 67,395 $ 41,316 $410,939
Mortgage loans available for sale 1,564 0 0 0 0 1,564
Investment securities 0 695 3,293 23,351 44,226 71,565
Federal funds sold 5,020 0 0 0 0 5,020
Interest bearing deposit account -FHLB 306 0 0 0 0 306
Other earning assets 0 0 0 0 2,399 2,399
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 278,355 $ 10,748 $ 24,003 $ 90,746 $ 87,941 $491,793
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW, savings, and money market deposits $ 117,828 $ 0 $ 0 $ 0 $ 0 $117,828
Certificates of deposit of $100,000 or more 13,889 20,867 64,742 29,614 0 129,112
Other time deposits 13,295 20,964 74,448 41,632 1 150,340
Other short term borrowings 1,924 0 0 0 0 1,924
Other borrowed money 0 4,000 0 5,357 12,000 21,357
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 146,936 $ 45,831 $ 139,190 $ 76,603 $ 12,001 $420,561
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive gap 131,419 (35,083) (115,187) 14,143 75,940 71,232
Cumulative interest-sensitive gap 131,419 96,336 (18,851) (4,708) 71,232
- ----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive gap
to total earning assets 26.72% 19.59% -3.83% -0.96% 14.48%
Management tries to minimize interest rate risk between interest earning
assets and interest bearing liabilities by attempting to minimize wide
fluctuations in net interest income due to interest rate movements. The ability
to control these fluctuations has a direct impact on the profitability of the
Company. Management monitors this activity on a regular basis through analysis
of its portfolios to determine the difference between rate sensitive assets and
rate sensitive liabilities.
The Company's rate sensitive assets are those earning interest at variable
rates and those maturing within one year. Rate sensitive assets therefore
include both loans and available-for-sale securities. Rate sensitive
liabilities include interest-bearing checking accounts, money market deposit
accounts, savings accounts, certificates of deposit and borrowed funds. At
December 31, 2000, 65% of the Company's interest earning assets, excluding
non-accrual loans could be repriced within one year, compared to 79% of
interest-bearing
A-8
liabilities. Rate sensitive assets at December 31, 2000 totaled $491.8 million,
exceeding rate sensitive liabilities of approximately $420.6 million by $71.2
million.
Based upon the Company's asset liability management strategies, sensitivity
comparisons, and rate shift analysis, management does not anticipate the
Company's net interest margins to be materially affected by inflation and
changing prices.
An analysis of the Company's financial condition and growth can be made by
examining the changes and trends in interest-earning assets and interest-bearing
liabilities, and a discussion of these changes and trends follows.
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
All of the Company's investment securities are held in the
available-for-sale ("AFS") category. At December 31, 2000 the market value of
AFS securities totaled $71.6 million, compared to $62.5 million and $63.2
million at December 31, 1999 and 1998, respectively. Table 4 presents the
market value of the presently held AFS securities for the years ended December
31, 2000, 1999 and 1998.
TABLE 4 - SUMMARY OF INVESTMENT PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER
(DOLLARS IN THOUSANDS) 31, 2000 31, 1999 31, 1998
- -------------------------------------------------- ----------- ----------- -----------
UNITED STATES GOVERNMENT SECURITIES: - $ 900 $ 912
OBLIGATIONS OF UNITED STATES GOVERNMENT
AGENCIES AND CORPORATIONS: $ 25,119 $ 23,374 $ 20,169
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS: $ 22,228 $ 22,012 $ 22,192
MORTGAGE BACKED SECURITIES: $ 24,218 $ 16,212 $ 19,955
TOTAL SECURITIES: $ 71,565 $ 62,498 $ 63,228
The composition of the investment securities portfolio reflects the
Company's investment strategy of maintaining an appropriate level of liquidity
while providing a relatively stable source of income. The investment portfolio
also provides a balance to interest rate risk and credit risk in other
categories of the balance sheet while providing a vehicle for the investment of
available funds, furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
The Company's investment portfolio consists of U.S. government agency
securities, municipal securities and U.S. government agency sponsored
mortgage-backed securities. AFS securities averaged $66.2 million in 2000,
$60.6 million in 1999 and $59.8 million in 1998. Table 5 presents the AFS
securities held by the Company by maturity category at December 31, 2000.
TABLE 5 - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD ON INVESTMENTS
ONE YEAR OR LESS AFTER ONE YEAR AFTER 5 YEARS AFTER 10 YEARS TOTALS
THROUGH 5 YEARS THROUGH 10 YEARS
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
- -------------------------------------------------------------------------------------------------------------------------
BOOK VALUE:
United States Government agencies $ 2,005 7.05% $11,994 6.86% $ 10,998 7.11% - - $24,997 6.98%
States and political subdivisions 1,998 6.82% 11,176 7.00% 5,913 6.69% 3,078 7.00% 22,165 6.90%
Mortgage backed securities - - - - 1,883 7.08% 22,514 7.04% 24,397 7.05%
=========================================================================================================================
Total securities $ 4,003 6.93% $23,170 6.93% $ 18,794 6.97% $25,592 7.04% $71,559 6.98%
LOANS
The loan portfolio is the largest category of the Company's earnings assets
and is comprised of commercial loans, real estate mortgage loans, real estate
construction loans and consumer loans. The Company restricts its primary lending
market to within the
A-9
Catawba Valley region of North Carolina, which encompasses Catawba, Alexander
and Lincoln counties and portions of Iredell and Gaston counties. The mix of the
loan portfolio consists primarily of loans secured by real estate and commercial
loans. In management's opinion, there are no significant concentrations of
credit with particular borrowers engaged in similar activities.
In the normal course of business, there are various commitments outstanding
to extend credit that are not reflected in the financial statements. At December
31, 2000, outstanding loan commitments totaled $89.4 million. 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 may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
The composition of the Company's loan portfolio is presented in Table 6.
TABLE 6 - LOAN PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS
=================================================================================================================================
BREAKDOWN OF LOAN RECEIVABLES:
Commercial, financial & agricultural $ 96,882 23.58% $ 83,644 24.66% $ 89,536 29.68% $ 80,230 33.42%
Real Estate - Mortgage 229,260 55.79% 190,921 56.28% 157,167 52.11% 115,768 48.22%
Real Estate - Construction 58,939 14.34% 39,340 11.60% 29,927 9.92% 24,291 10.12%
Consumer 25,858 6.29% 25,293 7.46% 24,995 8.29% 19,793 8.24%
-------- ----------- -------- ----------- -------- ----------- -------- -----------
Total loans $410,939 100.00% $339,198 100.00% $301,625 100.00% $240,082 100.00%
Less: Allowance for Loan Losses 4,713 3,924 4,137 4,375
-------- -------- -------- --------
Net Loans $406,226 $335,274 $297,488 $235,707
-------- -------- -------- --------
YEAR ENDED
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS
============================================================
BREAKDOWN OF LOAN RECEIVABLES:
Commercial, financial & agricultural $ 59,624 32.57%
Real Estate - Mortgage 90,156 49.25%
Real Estate - Construction 14,875 8.13%
Consumer 18,394 10.05%
-------- -----------
Total loans $183,049 100.00%
Less: Allowance for Loan Losses 3,745
--------
Net Loans $179,304
========
As of December 31, 2000, gross loans outstanding were $410.9 million, an
increase of $71.7 million or 21% over the December 31, 1999 balance of $339.2
million. Most of this growth was attributable to growth in real estate loans.
Real estate mortgage loans grew $38.3 million in 2000, while real estate
construction loans grew $19.6 million in 2000. The Company experienced an
increase of $13.2 million in the commercial loan portfolio. As a percentage of
the Company's total loan portfolio, real estate mortgage loans represented
55.79% in 2000, 56.29% in 1999 and 52.11% in 1998. Over the same period
commercial loans represented 23.58%, 24.66% and 29.68% of the Company's total
loan portfolio, respectively. Real estate construction loans made up 14.34%,
11.60% and 9.92% of the Company's total loan portfolio at December 31, 2000,
1999 and 1998, respectively. Consumer loans represented 6.29%, 7.46% and 8.29%
of the Company's total loan portfolio at December 31, 2000, 1999 and 1998,
respectively.
Mortgage loans held for sale were $1.6 million at December 31, 2000, a
decrease of $122,000 over the December 31, 1999 balance of $1.7 million which
represented a decrease of $7.6 million over the December 31, 1998 balance of
$9.3 million.
Table 7 identifies the maturities of all loans as of December 31, 2000 and
addresses the sensitivity of these loans to changes in interest rates.
TABLE 7 - MATURITY AND REPRICING DATA FOR LOANS
After one year
Within one through five After five
(DOLLARS IN THOUSANDS) YEAR OR LESS YEARS YEARS TOTAL LOANS
================================================================================================
Commercial, financial & agricultural $ 80,754 $ 11,812 $ 4,316 $ 96,882
Real Estate - Mortgage 155,023 32,396 41,841 229,260
Real Estate - Commercial 53,612 3,064 2,263 58,939
Consumer 9,161 13,208 3,489 25,858
- ------------------------------------------------------------------------------------------------
Total Loans $ 298,550 $ 60,480 $ 51,909 $ 410,939
================================================================================================
Total fixed rate loans 19,433 60,480 51,909 131,822
Total floating rate loans 279,117 - - 279,117
- ------------------------------------------------------------------------------------------------
Total loans $ 298,550 $ 60,480 $ 51,909 $ 410,939
- ------------------------------------------------------------------------------------------------
A-10
ASSET QUALITY
At December 31, 2000, approximately 9% of the Company's portfolio was not
secured by any type of collateral. Unsecured loans generally involve higher
credit risk than secured loans and, in the event of customer default, the
Company has a higher exposure to potential loan losses. Additionally, the real
estate loan portfolio can be affected by the condition of the local real estate
markets. Non-real estate commercial loans also can be affected by local economic
conditions.
The allowance for loan losses is established through charges to expense in
the form of a provision for loan losses. Loan losses and recoveries are charged
and credited directly to the allowance. The amount of the provision and level
of the allowance is based on management's judgment of potential losses within
the Company's loan portfolio, loan growth, net charge-offs, changes in the
composition of the loan portfolio, delinquencies, management's assessment of the
quality of the loan portfolio and general economic climate.
NON-PERFORMING ASSETS
Non-performing assets, comprised of non-accrual loans, other real
estate owned and loans for which payments are more than 90 days past due totaled
$6.1 million at December 31, 2000 compared to $3.6 million at December 31, 1999.
This increase represents some degree of parallel between credit-related issues
in the Bank's loan portfolio and general economic conditions. While the Bank
has recognized a small number of larger relationships classified as
non-performing, efforts are underway to reduce the amount of relationships so
classified. Larger relationships included in non-performing loans at December
31, 2000 are collateralized, and the Bank does not anticipate significant
losses.
It is the general policy of the Company to stop accruing interest
income and place the recognition of interest on a cash basis when a loan is
placed on non-accrual status and any interest previously accrued but not
collected is reversed against current income.
A summary of non-performing assets at December 31 for each of the years
presented is shown in table 8.
TABLE 8 - NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
YEAR 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Non-accrual loans $5,421 $2,866 $3,292 $3,075 $3,951
Loans 90 days or more past due and still accruing 545 645 328 586 1,143
Total non-performing loans 5,966 3,511 3,620 3,661 5,094
All other real estate owned 112 44 545 - 333
Total non-performing assets $6,078 $3,555 $4,165 $3,661 $5,427
AS A PERCENT OF TOTAL LOANS AT YEAR END
Non-accrual loans 1.32% 0.84% 1.09% 1.28% 2.16%
Loans 90 days or more past due and still accruing 0.13% 0.19% 0.11% 0.24% 0.62%
Total non-performing assets 1.48% 1.05% 1.38% 1.52% 2.96%
At December 31, 2000 the Company had non-performing loans, defined as
non-accrual and accruing loans past due more than 90 days, of $6.0 million or
1.45% of total loans. Non-performing loans for 1999 were $3.5 million, or 1.03%
of total loans and $3.6 million, or 1.20% of total loans for 1998. Interest that
would have been recorded on non-accrual loans for the years ended December 31,
2000, 1999 and 1998, had they performed in accordance with their original terms,
amounted to approximately $508,000, $333,000 and $398,000 respectively. Interest
income on non-accrual loans included in the results of operations for 2000,
1999, and 1998 amounted to approximately $94,000, $61,000 and $305,000,
respectively. The interest income collected on non-accrual loans in 1998
consists primarily of income collected through the restructuring of one large
commercial relationship in December 1998.
Management continually monitors the loan portfolio to ensure that all loans
potentially having a material adverse impact on future operating results,
liquidity or capital resources have been classified as non-performing. Should
economic conditions deteriorate, the inability of distressed customers to
service their existing debt could cause higher levels of non-performing loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses totaled $4.7 million, representing 1.15% of
total loans outstanding at December 31, 2000. For December 31, 1999 and 1998,
the allowance for loan losses amounted to $3.9 million, or 1.16% of total loans
outstanding and $4.1 million, or 1.37% of total loans outstanding, respectively.
To determine the allowance needed, management evaluates the risk characteristics
of the loan portfolio under current economic conditions and considers such
factors as the financial condition of the borrower, fair market value of
collateral and other items that, in management's opinion, deserve current
recognition in estimating possible credit losses.
A-11
Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
The Company does not currently allocate the allowance for loan losses to
the various loan categories. There were no significant changes in the methods
and assumptions used to determine the adequacy of the allowance during 2000.
Management's judgment in determining the adequacy of the allowance is based on
evaluations of the collectibility of loans. These evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, current economic conditions that may affect the borrower's ability to
pay, overall portfolio quality, and review of specific loan problems.
Total non-performing assets were $6.1 million in 2000, $3.6 million in 1999
and $4.2 million in 1998. The ratio of net charge-offs to average total loans
was 0.29% in 2000, 0.20% in 1999 and 0.25% in 1998. The ratio of non-performing
assets to total loans was 1.48% at December 31, 2000, as compared to 1.05% and
1.38% at December 31, 1999 and 1998, respectively.
Table 9 presents an analysis of the allowance for loan losses, including
charge-off activity.
TABLE 9 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999 1998 1997 1996
=============================================================================================================================
RESERVE FOR LOAN LOSSES AT BEGINNING OF YEAR $ 3,924 $ 4,137 $ 4,375 $ 3,745 $ 3,880
LOANS CHARGED OFF:
Commercial, financial, and agricultural 857 485 608 8 1,012
Real estate - mortgage 10 25 - - -
Real estate - construction 36 - - - -
Consumer 255 195 138 131 129
Total loans charged off $ 1,158 $ 705 $ 746 $ 139 $ 1,141
- -----------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOSSES PREVIOUSLY CHARGED OFF:
Commercial, financial, and agricultural 20 24 39 60 -
Real estate - mortgage - - - - -
Real estate - construction - - - - -
Consumer 48 43 24 12 26
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 68 $ 67 $ 63 $ 72 $ 26
- -----------------------------------------------------------------------------------------------------------------------------
Net loans charged off $ 1,090 $ 638 $ 683 $ 67 $ 1,115
Provision for loan losses 1,879 425 445 697 980
- -----------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses at end of year $ 4,713 $ 3,924 $ 4,137 $ 4,375 $ 3,745
=============================================================================================================================
Loans charged off net of recoveries, as
a percent of average loans outstanding 0.29% 0.20% 0.25% 0.03% 0.68%
DEPOSITS
The Company primarily uses deposits to fund its loan and investment
portfolios. The Company offers a variety of deposit accounts to individuals and
businesses. Deposit accounts include checking, savings, money market and
certificates of deposit. Certificates of deposit in amounts of $100,000 or more
totaled $129.1 million at December 31, 2000, $89.3 million and $75.1 million at
December 31, 1999 and 1998, respectively. The majority of these deposits are
from customers who reside or own businesses in the Bank's primary service area,
and therefore, are believed by the Bank to be stable, and for all practicable
purposes, no more rate sensitive than core deposits.
As of December 31, 2000, total deposits were $450.1 million, an increase of
$73.4 million or 19% increase over the December 31, 1999 balance of $376.6
million. The increase in deposits is primarily attributable to growth in time
deposits which resulted from deposit campaigns throughout 2000.
A-12
Table 10 is a summary of the maturity distribution of certificates of deposit in
amounts of $100,000 or more as of December 31, 2000.
TABLE 10 - MATURITIES OF TIME DEPOSITS OVER $100,000
(DOLLARS IN THOUSANDS)
================================================
MATURITY PERIOD Amount
================================================
Three months or less $ 34,756
Over three months through six months 29,855
Over six months through twelve months 34,887
Over twelve months 29,614
--------
Total $129,112
========
BORROWED FUNDS
The Company has access to various short-term borrowings, including the
purchase of Federal Funds and borrowing arrangements from the FHLB and other
financial institutions. At December 31, 2000, FHLB borrowings totaled $21.4
million compared to $14.5 million at December 31, 1999 and $13.6 million at
December 31, 1998. Average FHLB borrowings for 2000 were $15.8 million, compared
to average balances of $13.5 million for 1999 and $15.3 million for 1998. The
maximum amount of outstanding FHLB borrowings was $21.4 million in 2000, and
$14.5 in 1999 and $21.8 in 1998. The FHLB advances outstanding at December 31,
2000 had both fixed and adjustable interest rates ranging from 5.86% to 6.49%.
Approximately $4.0 million of the FHLB advances outstanding mature prior to
December 31, 2001. Additional information regarding FHLB advances is provided
in note 7 to the consolidated financial statements.
Demand notes payable to the U. S. Treasury amounted to approximately $1.6
million at December 31, 2000 and 1999, and approximately $139,000 at December
31, 1998.
CAPITAL RESOURCES
Shareholders' equity at December 31, 2000 was $43.0 million compared to
$38.0 million and $35.9 million at December 31, 1999 and 1998, respectively. At
December 31, 2000, unrealized gains and losses net of tax in the
available-for-sale securities portfolio amounted to a gain of approximately
$4,000. For the years ended December 31, 1999 and 1998, unrealized gains and
losses net of tax in the available-for-sale securities portfolio amounted to a
loss of approximately $920,000 and a gain of approximately $459,000,
respectively. Average shareholders' equity as a percentage of total average
assets is one measure used to determine capital strength. Average shareholders'
equity as a percentage of total average assets was 9.13%, 9.43% and 9.00% for
2000, 1999 and 1998. The return on average shareholders' equity was 12.55% at
December 31, 2000 as compared to 11.54% and 12.04% as of December 31, 1999 and
December 31, 1998, respectively.
Under regulatory capital guidelines, financial institutions are currently
required to maintain a total risk-based capital ratio of 8.0% or greater, with a
Tier 1 risk-based capital ratio of 4.0% or greater. Tier 1 capital is generally
defined as shareholders' equity less all intangible assets and goodwill. The
Company's Tier I capital ratio was 10.11%, 10.99% and 11.04% at December 31,
2000, 1999 and 1998, respectively. Total risk based capital is defined as Tier
1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital,
consists of the Company's allowance for loan losses, not exceeding 1.25% of the
Company's risk-weighted assets. Total risk-based capital ratio is therefore
defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to
risk-weighted assets. The Company's total risk based capital ratio was 11.22%,
12.11% and 12.29% at December 31, 2000, 1999 and 1998, respectively. In
addition to the Tier I and total risk-based capital requirements, financial
institutions are also required by the FDIC to maintain a leverage ratio of Tier
1 capital to total average assets of 4.0% or greater. The Company's Tier I
leverage capital ratio was 9.10%, 9.21% and 9.41% at December 31, 2000, 1999 and
1998, respectively.
A Bank is considered to be "well capitalized" if it has a total risk-based
capital ratio of 10.0 % or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and has a leverage ratio of 5.0% or greater. Based upon these
guidelines, the Bank was considered to be "well capitalized" at December 31,
2000, 1999 and 1998, respectively.
A-13
The Company's key equity ratios as of December 31, 2000, 1999 and 1998 are
presented in Table 11:
TABLE 11 - EQUITY RATIOS
YEARS ENDED DECEMBER 31,
2000 1999 1998
=========================================================
Return on average assets 1.15% 1.09% 1.08%
Return on average equity 12.55% 11.54% 12.04%
Dividend payout ratio 23.39% 23.84% 22.61%
Average equity to average assets 9.13% 9.43% 9.00%
COMPANY REORGANIZATION
Effective August 31, 1999, the Bank completed the process of converting to
the holding company form of organization. The Bank is now a subsidiary of the
Company, a one-bank holding company, headquartered in Newton, North Carolina.
As a result of the reorganization, each share of the Bank's common stock
was automatically converted into one share of the Company's common stock. The
Company is now the sole shareholder of the Bank. The corporate reorganization
was accounted for in a manner similar to a pooling of interest.
The Company's Board of Directors is composed of the same persons who are
directors of the Bank. Robert C. Abernethy, Chairman of the Board of the Bank,
is also Chairman of the Company's Board of Directors. The Bank's President and
Chief Executive Officer, Tony W. Wolfe, is also President and Chief Executive
Officer of the Company. Joseph F. Beaman, Jr., who serves as Executive Vice
President, Chief Financial Officer and Corporate Secretary of the Bank also
serves as Executive Vice President, Chief Financial Officer, Corporate Secretary
and Treasurer of the Company.
A-14
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. This risk of loss can be reflected
in either diminished current market values or reduced potential net interest
income in future periods.
The Company's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. The structure of the Company's
loan and deposit portfolios is such that a significant decline (increase) in
interest rates may adversely impact net market values and interest income.
Management seeks to manage the risk through the utilization of its investment
securities and off balance sheet derivative instruments. During the years ended
December 31, 2000, 1999 and 1998, the Company has used interest rate contracts
to manage market risk. In 1998, the Company entered into an interest rate cap
to protect certain designated deposit accounts from the upward effects of
repricing in the event of an increasing rate environment. The total cost of the
interest rate cap arrangement was $21,600, which was expensed on a straight-line
basis for the life of the instrument. For the years ended December 31, 2000,
1999 and 1998, the Company expensed $3,200, $22,944 and $31,747, respectively,
related to derivative financial instruments. The Company had no off-balance
sheet derivative financial instruments at December 31, 2000.
Table 12 presents in tabular form the contractual balances and the
estimated fair value of the Company's on-balance sheet financial instruments and
the notional amount and estimated fair value of the Company's off-balance sheet
derivative instruments at their expected maturity dates for the period ended
December 31, 2000. The expected maturity categories take into consideration
historical prepayment experience as well as management's expectations based on
the interest rate environment at December 31, 2000. For core deposits without
contractual maturity (i.e. interest bearing checking, savings, and money market
accounts), the table presents principal cash flows based on management's
judgment concerning their most likely runoff or repricing behaviors.
TABLE 12- MARKET RISK TABLE
(IN THOUSANDS) PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
LOANS RECEIVABLE 2001 2002 2003 2004 & 2005 THEREAFTER TOTAL
=============================================================================================================================
Fixed rate $ 30,709 $ 12,400 $ 12,187 $ 33,659 $ 31,177 $120,132
Average interest rate 9.43% 9.92% 9.70% 8.86% 8.52%
Variable rate $ 278,382 $ 1,584 $ 1,993 $ 5,167 $ 3,680 $290,807
Average interest rate 8.76% 8.49% 8.11% 7.86% 8.86%
INVESTMENT SECURITIES .
=============================================================================================================================
Interest bearing cash $ 306 $ - $ - $ - $ - $ 306
Average interest rate 6.26% - - - -
Federal funds sold $ 5,020 $ - $ - $ - $ - $ 5,020
Average interest rate 6.14% - - - -
Securities available for sale $ 3,989 $ 6,510 $ 2,553 $ 14,289 $ 44,224 $ 71,565
Average interest rate 6.93% 5.41% 6.93% 6.93% 7.01%
Nonmarketable equity securities $ - $ - $ - $ - $ 2,399 $ 2,399
Average interest rate - - - - -
DEBT OBLIGATIONS
=============================================================================================================================
Deposits $ 242,330 $ 100,560 $ 38,261 $ 34,788 $ 34,135 $450,073
Average interest rate 6.14% 6.71% 6.38% 5.76% 4.24%
Advances from FHLB $ 4,000 $ - $ 357 $ 5,000 $ 12,000 $ 21,357
Average interest rate 6.35% - 5.86% 6.16% 6.04%
Demand Notes payable to U.S. Treasury $ 1,600 $ - $ - $ - $ - $ 1,600
Average interest rate 6.49% - - - -
LOANS RECEIVABLE FAIR VALUE
===================================================
Fixed rate $ 116,550
Average interest rate
Variable rate $ 290,402
Average interest rate
INVESTMENT SECURITIES
===================================================
Interest bearing cash $ 306
Average interest rate
Federal funds sold $ 5,020
Average interest rate
Securities available for sale $ 71,565
Average interest rate
Nonmarketable equity securities $ 2,399
Average interest rate
DEBT OBLIGATIONS
===================================================
Deposits $ 465,912
Average interest rate
Advances from FHLB $ 22,217
Average interest rate
Demand Notes payable to U.S. Treasury $ 1,600
Average interest rate
A-15
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Peoples Bancorp common stock is traded on the over-the-counter (OTC) market
and quoted on the Nasdaq National Market, under the symbol "PEBK". Peoples
Bancorp stock is marketed by IJL/Wachovia and Scott & Stringfellow, Inc.
Although the payment of dividends by the Company is subject to certain
requirements and limitations of North Carolina corporate law, neither the
Commissioner nor the FDIC have promulgated any regulations specifically limiting
the right of the Company to pay dividends and repurchase shares. However, the
ability of the Company to pay dividends and repurchase shares may be dependent
upon the Company's receipt of dividends from the Bank. The Bank's ability to
pay dividends is limited. North Carolina commercial banks, such as the Bank,
are subject to legal limitations on the amounts of dividends they are permitted
to pay. Dividends may be paid by the Bank from undivided profits, which are
determined by deducting and charging certain items against actual profits,
including any contributions to surplus required by North Carolina law. Also,
an insured depository institution, such as the Bank, is prohibited from making
capital distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
defined in the applicable law and regulations). Based on its current financial
condition, the Bank does not expect that this provision will have any impact on
the Bank's ability to pay dividends.
As of March 7, 2001, the Company had 663 shareholders of record, not
including the number of persons or entities whose stock is held in nominee or
street name through various brokerage firms or banks. The market price for the
Company's common stock was $14.25 on March 7, 2001.
Following is certain market and dividend information for the last two
fiscal years. Information for quarters prior to the third quarter of 1999
relates to the Bank's common stock. Over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark down or commission and may not
necessarily represent actual transactions.
MARKET AND DIVIDEND DATA
CASH DIVIDEND
2000 LOW BID HIGH BID PER SHARE *
First Quarter $ 11.591 $ 13.636 $ 0.09
Second Quarter $ 12.159 $ 16.25 $ 0.10
Third Quarter $ 12.00 $ 13.625 $ 0.10
Fourth Quarter $ 11.625 $ 13.50 $ 0.10
CASH DIVIDEND
1999 LOW BID* HIGH BID* PER SHARE *
First Quarter $ 15.30 $ 19.55 $ 0.08
Second Quarter $ 17.27 $ 19.55 $ 0.08
Third Quarter $ 15.91 $ 18.18 $ 0.09
Fourth Quarter $ 13.18 $ 16.36 $ 0.09
* Shares outstanding and per share computations have been restated to reflect a
10% stock dividend during second quarter 2000 and the 3 for 2 stock split
during first quarter 1999.
A-16
DIRECTORS AND OFFICERS OF THE COMPANY
DIRECTORS
- ---------
ROBERT C. ABERNETHY - CHAIRMAN
- ------------------------------
Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank;
President, Secretary and Treasurer, Carolina Glove Company, Inc. (glove
manufacturer)
JAMES S. ABERNETHY
- ------------------
President and Assistant Secretary, Midstate Contractors, Inc. (paving company)
BRUCE R. ECKARD
- ---------------
President, Eckard Vending Company, Inc. (vending machine servicer)
JOHN H. ELMORE, JR.
- -------------------
Chairman of the Board, Chief Executive Officer an Treasurer; Elmore
Construction Company, Inc.
B. E. MATTHEWS
- --------------
Chief Executive Officer and Director, Matthews Construction Company, Inc.
CHARLES F. MURRAY
- -----------------
President, Murray's Hatchery, Inc.
LARRY E. ROBINSON
- -----------------
President and Chief Executive Officer, Blue Ridge Distributing Co., Inc. (beer
and wine distributor) & President and Chief Executive Officer, Associated
Brands, Inc. (beer and wine distributor)
FRED L. SHERRILL, JR.
- ---------------------
Retired (furniture manufacturing executive)
DAN RAY TIMMERMAN, SR.
- -------------------------
President, Timmerman Manufacturing, Inc. (wrought iron furniture manufacturer)
BENJAMIN I. ZACHARY
- ---------------------
General Manager, Treasurer, Secretary and Member of the Board of Directors,
Alexander Railroad Company
OFFICERS
- --------
TONY W. WOLFE
- ---------------
President and Chief Executive Officer
JOSEPH F. BEAMAN, JR.
- ------------------------
Executive Vice President, Chief Financial Officer, Corporate Secretary and
Treasurer
GEORGE S. EARP
- ----------------
Vice President - Finance and Assistant Treasurer
N. MICHAEL HAMRA
- ------------------
Vice President - Risk Management Services and Assistant Corporate Secretary
KRISSY O. PRICE
- -----------------
Assistant Vice President and Assistant Corporate Secretary
A-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Peoples Bancorp of North Carolina, Inc.
Newton, North Carolina:
We have audited the accompanying consolidated balance sheets of Peoples Bancorp
of North Carolina, Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of earnings, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Bancorp of
North Carolina, Inc. as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with generally accepted accounting principles.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
January 12, 2001
A-18
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
Assets
------
2000 1999
------------ ------------
Cash and due from banks, including reserve requirements
of $4,739,000 and $4,009,000 $ 13,619,197 14,067,311
Federal funds sold 5,020,000 2,930,000
------------ ------------
Cash and cash equivalents 18,639,197 16,997,311
Investment securities available for sale 71,564,844 62,498,359
Other investments 2,398,873 1,345,100
Mortgage loans held for sale 1,563,700 1,685,472
Loans, net 406,226,100 335,273,577
Premises and equipment, net 12,907,968 9,342,582
Accrued interest receivable and other assets 5,701,105 5,292,453
------------ ------------
$519,001,787 432,434,854
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 52,793,390 53,506,430
Interest-bearing demand 34,620,234 31,752,477
Savings 83,207,677 77,556,576
Time, $100,000 or more 129,111,812 89,306,653
Other time 150,340,229 124,512,233
------------ ------------
Total deposits 450,073,342 376,634,369
Demand notes payable to U. S. Treasury 1,600,000 1,600,000
Federal Home Loan Bank advances 21,357,142 14,500,000
Accrued interest payable and other liabilities 2,932,284 1,702,006
------------ ------------
Total liabilities 475,962,768 394,436,375
------------ ------------
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, no par value; authorized 20,000,000 shares;
issued and outstanding 3,218,714 in 2000 and 2,926,318 in 1999 36,407,798 31,729,462
Retained earnings 6,627,533 7,189,417
Accumulated other comprehensive income (loss) 3,688 (920,400)
------------ ------------
Total shareholders' equity 43,039,019 37,998,479
------------ ------------
$519,001,787 432,434,854
============ ============
See accompanying notes to consolidated financial statements.
A-19
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ----------- ----------
Interest income:
Interest and fees on loans $36,423,973 28,375,391 24,885,434
Interest on federal funds sold 281,659 338,941 323,149
Interest on investment securities:
U. S. Treasuries 16,572 50,221 85,079
U. S. Government agencies 2,977,459 2,297,645 2,236,446
State and political subdivisions 988,020 973,744 881,058
Other 171,600 266,097 803,939
------------ ----------- ----------
Total interest income 40,859,283 32,302,039 29,215,105
------------ ----------- ----------
Interest expense:
Interest-bearing demand deposits 455,504 430,253 547,343
Savings deposits 3,303,980 2,925,123 2,472,910
Time deposits 14,566,875 10,653,642 10,596,180
Federal Home Loan Bank advances 974,036 735,752 874,896
Other 131,705 45,501 48,639
------------ ----------- ----------
Total interest expense 19,432,100 14,790,271 14,539,968
------------ ----------- ----------
Net interest income 21,427,183 17,511,768 14,675,137
Provision for loan losses 1,879,100 425,000 445,000
------------ ----------- ----------
Net interest income after provision for loan losses 19,548,083 17,086,768 14,230,137
------------ ----------- ----------
Other income:
Service charges on deposit accounts 1,588,390 1,326,810 1,186,600
Other service charges and fees 367,352 298,454 281,542
Gain (loss) on sale of securities (483,472) (34,824) 168,448
Mortgage banking income 241,007 740,031 1,049,402
Insurance and brokerage commissions 168,557 129,786 152,630
Miscellaneous 2,033,930 919,804 807,331
------------ ----------- ----------
Total other income 3,915,764 3,380,061 3,645,953
------------ ----------- ----------
Other expenses:
Salaries and employee benefits 8,899,285 7,737,404 6,353,745
Occupancy 2,509,720 2,230,448 1,955,803
Other operating 4,099,972 3,863,652 3,710,861
------------ ----------- ----------
Total other expenses 15,508,977 13,831,504 12,020,409
------------ ----------- ----------
Earnings before income taxes 7,954,870 6,635,325 5,855,681
Income tax expense 2,576,400 2,093,380 1,846,483
------------ ----------- ----------
Net earnings $ 5,378,470 4,541,945 4,009,198
============ =========== ==========
Net earnings per share $ 1.67 1.41 1.31
============ =========== ==========
See accompanying notes to consolidated financial statements.
A-20
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated
Common Stock Other
------------------------ Retained Comprehensive
Shares Amount Earnings Income Total
---------- ------------ ----------- ----------- -----------
Balance, December 31, 1997 2,553,000 $23,942,905 632,573 355,011 24,930,489
Issuance of common stock 373,500 7,787,467 - - 7,787,467
Cash dividends declared
($.28 per share) - - (906,600) - (906,600)
Net earnings - - 4,009,198 - 4,009,198
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - 103,581 103,581
---------- ------------ ----------- ----------- -----------
Balance, December 31, 1998 2,926,500 $31,730,372 3,735,171 458,592 35,924,135
Cash paid in lieu of fractional
shares (182) (910) (4,961) - (5,871)
Cash dividends declared
($0.34 per share) - - (1,082,738) - (1,082,738)
Net earnings - - 4,541,945 - 4,541,945
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - (1,378,992) (1,378,992)
---------- ------------ ----------- ----------- -----------
Balance, December 31, 1999 2,926,318 $31,729,462 7,189,417 (920,400) 37,998,479
10% stock dividend 292,396 4,678,336 (4,678,336) - -
Cash paid in lieu of fractional shares - - (3,775) - (3,775)
Cash dividends declared
($0.39 per share) - - (1,258,243) - (1,258,243)
Net earnings - - 5,378,470 - 5,378,470
Change in net unrealized
gain (loss) on investment
securities available for
sale, net of tax - - - 924,088 924,088
---------- ------------ ----------- ----------- -----------
Balance, December 31, 2000 3,218,714 $36,407,798 6,627,533 3,688 43,039,019
========== ============ =========== =========== ===========
See accompanying notes to consolidated financial statements.
A-21
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---------- ----------- ----------
Net earnings $5,378,470 4,541,945 4,009,198
---------- ----------- ----------
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale 1,030,186 (2,293,615) 338,115
Reclassification adjustment for (gains) losses on
sales of investment securities available for sale 483,472 34,824 (168,448)
---------- ----------- ----------
Total other comprehensive income (loss),
before income taxes 1,513,658 (2,258,791) 169,667
---------- ----------- ----------
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding gains (losses) on investment
securities available for sale 401,258 (893,363) 131,696
Reclassification adjustment for (gains) losses on
sales of investment securities available for sale 188,312 13,564 (65,610)
---------- ----------- ----------
Total income tax expense (benefit) related to
other comprehensive income 589,570 (879,799) 66,086
---------- ----------- ----------
Total other comprehensive income (loss),
net of tax 924,088 (1,378,992) 103,581
---------- ----------- ----------
Total comprehensive income $6,302,558 3,162,953 4,112,779
========== =========== ==========
See accompanying notes to consolidated financial statements.
A-22
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------ ------------
Cash flows from operating activities:
Net earnings $ 5,378,470 4,541,945 4,009,198
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation, amortization and accretion 1,531,860 1,794,646 1,642,559
Provision for loan losses 1,879,100 425,000 445,000
Provision for deferred taxes (246,511) 915,285 359,486
Loss (gain) on sale of investment securities 483,472 34,824 (168,448)
Loss (gain) on sale of premises and equipment (598,308) 12,925 (1,503)
Loss (gain) on sale of mortgage loans 292,796 369,583 44,659
Loss (gain) on sale of other real estate (9,226) 64,943 (30,009)
Change in:
Other assets (1,090,782) (1,006,947) (763,080)
Other liabilities 1,230,278 (797,420) (427,536)
Mortgage loans held for sale (171,024) 7,204,762 (6,562,004)
------------- ------------ ------------
Net cash provided (used) by operating activities 8,680,125 13,559,546 (1,451,678)
------------- ------------ ------------
Cash flows from investing activities:
Purchase of investment securities available for sale (33,291,361) (23,737,969) (43,374,408)
Proceeds from calls and maturities of investment securities
available for sale 7,139,920 15,076,886 25,818,882
Proceeds from sales of investment securities available
for sale 18,129,483 6,896,296 7,616,174
Change in other investments (1,053,773) 150,200 1,524,300
Net change in loans (72,926,623) (38,273,585) (62,974,283)
Purchases of premises and equipment (2,243,860) (1,857,657) (2,109,610)
Proceeds from sale of premises and equipment 1,916,505 4,500 4,900
Construction in progress (3,779,053) (870,284) -
Improvements to other real estate - (241,951) (167,445)
Proceeds from sale of other real estate 36,426 740,962 400,138
------------- ------------ ------------
Net cash used by investing activities (86,072,336) (42,112,602) (73,261,352)
------------- ------------ ------------
Cash flows from financing activities:
Net change in deposits 73,438,973 26,566,991 74,674,475
Net change in demand notes payable to U. S. Treasury - 1,460,765 (1,677,366)
Net change in FHLB borrowings 6,857,142 857,143 (8,142,823)
Cash dividends (1,258,243) (1,082,738) (906,600)
Proceeds from issuance of common stock, net of offering costs - - 7,787,467
Cash paid in lieu of fractional shares (3,775) (5,871) -
------------- ------------ ------------
Net cash provided by financing activities 79,034,097 27,796,290 71,735,153
------------- ------------ ------------
Net change in cash and cash equivalents 1,641,886 (756,766) (2,977,877)
Cash and cash equivalents at beginning of year 16,997,311 17,754,077 20,731,954
------------- ------------ ------------
Cash and cash equivalents at end of year $ 18,639,197 16,997,311 17,754,077
============= ============ ============
A-23
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ---------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $18,952,793 14,812,486 14,563,557
Income taxes $ 2,663,000 1,000,000 2,029,431
Noncash investing and financing activities:
Change in net unrealized gain/loss on investment
securities available for sale, net of tax $ 924,088 (1,378,992) 103,581
Transfer of loans to other real estate $ 95,000 123,451 747,538
Financed sales of other real estate $ - 60,000 -
See accompanying notes to consolidated financial statements.
A-24
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Peoples Bancorp of North Carolina, Inc. (Bancorp) received regulatory
approval to operate as a bank holding company on July 22, 1999, and became
effective August 31, 1999. Bancorp is primarily regulated by the Federal
Reserve Bank, and serves as the one bank holding company for Peoples Bank.
Peoples Bank (the "Bank") commenced business in 1912 upon receipt of its
banking charter from the North Carolina State Banking Commission (the
"SBC"). The Bank is primarily regulated by the SBC and the Federal Deposit
Insurance Corporation and undergoes periodic examinations by these
regulatory agencies. The Bank, whose main office is in Newton, North
Carolina, provides a full range of commercial and consumer banking services
primarily in Catawba, Alexander and Lincoln counties in North Carolina.
Peoples Investment Services, Inc. is a wholly owned subsidiary of the Bank,
which began operations in 1996 to provide investment and trust services
through agreements with an outside party.
Peoples Real Estate and Appraisal Services, Inc. is a wholly owned
subsidiary of the Bank which began operations in 1997 to provide real
estate appraisal and property management services to individuals and
commercial customers of the Bank.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the financial statements of
Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary,
Peoples Bank, along with its wholly owned subsidiaries, Peoples Investment
Services, Inc. and Peoples Real Estate and Appraisal Services, Inc.
(collectively called the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
Basis of Presentation
-----------------------
The accounting principles followed by the Company, and the methods of
applying these principles, conform with generally accepted accounting
principles ("GAAP") and with general practices in the banking industry. In
preparing the financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
in the financial statements. Actual results could differ significantly from
these estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include,
but are not limited to, the determination of the allowance for loan losses
and valuation of real estate acquired in connection with or in lieu of
foreclosure on loans.
Investment Securities
----------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought and
held principally for sale in the near term. Held to maturity securities are
those securities for which the Company has the ability and intent to hold
the security until maturity. All other securities not included in trading
or held to maturity are classified as available for sale. At December 31,
2000 and 1999, the Company had classified all of its investment securities
as available for sale.
Trading and available for sale securities are recorded at fair value. Held
to maturity securities are recorded at cost, adjusted for the amortization
or accretion of premiums or discounts. Unrealized holding gains and losses
on trading securities are recognized currently in earnings. Unrealized
holding gains and losses, net of the related tax effect, on securities
available for sale are excluded from earnings and are reported as a
separate component of shareholders' equity until realized.
A decline in the market value of any available for sale investment below
cost that is deemed other than temporary is charged to earnings and
establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining
the cost of securities sold.
A-25
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Other Investments
------------------
Other investments include equity securities with no readily determinable
fair value. These investments are carried at cost.
Mortgage Loans Held for Sale
--------------------------------
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. At December 31, 2000 and 1999, the cost of mortgage loans
held for sale approximates the market value.
Loans and Allowance for Loan Losses
----------------------------------------
Loans are stated at principal amount outstanding, net of the allowance for
loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
Impaired loans are measured based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, or at the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when, based on current
information and events, it is probable that all amounts due according to
the contractual terms of the loan will not be collected.
Accrual of interest is discontinued on a loan when management believes,
after considering economic conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is
doubtful. Interest previously accrued but not collected is reversed against
current period earnings when such loans are placed on nonaccrual status.
The allowance for loan losses is established through a provision for loan
losses charged to earnings. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the
principal is unlikely. The allowance represents an amount, which, in
management's judgment, will be adequate to absorb probable losses on
existing loans that may become uncollectible.
Management's judgment in determining the adequacy of the allowance is based
on evaluations of the collectibility of loans. These evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, current economic conditions that may affect the borrower's
ability to pay, overall portfolio quality, and review of specific problem
loans.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgments different than those of
management.
Mortgage Banking Activities
-----------------------------
Mortgage banking income represents net gains from the sale of mortgage
loans and fees received from borrowers and loan investors related to the
Company's origination of single-family residential mortgage loans.
Mortgage servicing rights represent the unamortized cost of purchased and
originated contractual rights to service mortgages for others in exchange
for a servicing fee. Mortgage servicing rights are amortized over the
period of estimated net servicing income and are periodically adjusted for
actual prepayments of the underlying mortgage loans. Servicing assets
amounted to $920,119 and $970,318 at December 31, 2000 and 1999,
respectively. The Company recognized servicing assets of approximately
$172,000, $610,000 and $457,000 during 2000, 1999 and 1998, respectively,
and amortized approximately $220,000, $212,000 and $92,0000 during 2000,
1999 and 1998, respectively.
Mortgage loans serviced for others are not included in the accompanying
balance sheets. The unpaid principal balances of mortgage loans serviced
for others was $97,899,017 and $91,194,374 at December 31, 2000 and 1999,
respectively.
A-26
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Premises and Equipment
------------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the assets. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in earnings for the period.
The cost of maintenance and repairs which do not improve or extend the
useful life of the respective asset is charged to income as incurred,
whereas significant renewals and improvements are capitalized. The range of
estimated useful lives for premises and equipment are generally as follows:
Buildings and improvements 10 - 50 years
Furniture and equipment 3 - 10 years
Income Taxes
-------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Additionally, the recognition of future tax benefits, such as
net operating loss carryforwards, is required to the extent that
realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in
the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by such
asset is required. A valuation allowance is provided for the portion of the
deferred tax asset when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. In assessing the
realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
Intangible Assets
------------------
Deposit base premiums, representing the cost of acquiring deposits from
other financial institutions, are being amortized by charges to earnings
over seven years using the straight-line method. Amortization of deposit
base premiums was approximately $174,000 for 2000, 1999, and 1998.
Derivative Financial Instruments
----------------------------------
All derivative financial instruments held by the Company are held for
purposes other than trading. The Company uses interest rate floors and caps
for interest rate risk management. The net interest payable or receivable
on floors and caps is accrued and recognized as an adjustment to interest
income or interest expense of the related asset or liability. Premiums paid
for purchased floors and caps are amortized over the shorter of the term of
the instrument or the related asset or liability. Upon early termination,
the net proceeds received or paid, including premiums, are deferred and
included in other assets or liabilities and amortized over the shorter of
the remaining contract life or the maturity of the related asset or
liability. Upon disposition or settlement of the asset or liability being
hedged, deferral accounting is discontinued and any other related premium
is recognized in earnings.
Net Earnings Per Common Share
---------------------------------
Net earnings per common share is based on the weighted average number of
common shares outstanding during the period while the effects of potential
common shares outstanding during the period are included in diluted
earnings per share. The average market price during the year is used to
compute equivalent shares. For the years ended December 31, 2000, 1999 and
1998, "net earnings per share" equaled "diluted earnings per share", as the
potential common shares outstanding during the period had no effect on the
computation. Net earnings per share for the years ended December 31, 2000,
1999 and 1998 are computed based on weighted average shares outstanding of
3,218,714, 3,218,714 and 3,058,160, respectively.
During 1999, the Company declared a 3 for 2 stock split. Additionally, the
Company declared and distributed a 10% stock dividend to its shareholders
in April, 2000. All previously reported per share amounts have been
restated to reflect the stock split and stock dividend.
A-27
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Recent Accounting Pronouncements
----------------------------------
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for hedging derivatives and for
derivative instruments including derivative instruments embedded in other
contracts. It requires the fair value recognition of derivatives as assets
or liabilities in the financial statements. This statement becomes
effective for the Company on January 1, 2001. The Company believes the
adoption of these standards will not have a material impact on its
financial position, results of operations or liquidity.
(2) CORPORATE REORGANIZATION
Effective August 31, 1999, Peoples Bank completed the process of converting
to a holding company form of operation. Peoples Bancorp of North Carolina,
Inc. has become the parent of Peoples Bank. Bancorp is a North Carolina,
one-bank holding company, headquartered in Newton, North Carolina.
Peoples Bank's shareholders approved the holding company reorganization at
the Bank's annual meeting held in May, 1999. Regulatory approval was
received on July 22, 1999. The holding company conversion was completed
successfully on August 31, 1999. As a result of the conversion, each share
of Bank $5 par value common stock was converted into one share of Bancorp
no par value stock, and the Bank's common stock and additional paid-in
capital accounts were combined into Bancorp's common stock account. Certain
shareholders representing 182 shares were paid cash of $5,871 in lieu of
the issuance of fractional shares. Bancorp is now the sole shareholder of
the Bank.
(3) INVESTMENT SECURITIES
Investment securities available for sale at December 31, 2000 and 1999 are
as follows:
December 31, 2000
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
U.S. Government agencies $24,997,100 185,280 63,334 25,119,046
Mortgage-backed securities 24,396,834 141,760 320,829 24,217,765
State and political subdivisions 22,164,868 190,651 127,486 22,228,033
----------- ---------- ---------- ----------
Total $71,558,802 517,691 511,649 71,564,844
=========== ========== ========== ==========
December 31, 1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
U.S. Treasuries $ 900,117 - 398 899,719
U.S. Government agencies 23,830,736 - 456,322 23,374,414
Mortgage-backed securities 16,886,862 22,058 696,722 16,212,198
State and political subdivisions 22,388,260 96,955 473,187 22,012,028
----------- ---------- ---------- ----------
Total $64,005,975 119,013 1,626,629 62,498,359
=========== ========== ========== ==========
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
The amortized cost and fair value of investment securities available for
sale at December 31, 2000, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Estimated
Cost Fair Value
----------- -----------
Due within one year $ 4,003,505 3,988,900
Due from one to five years 23,169,647 23,351,468
Due from five to ten years 16,911,171 17,009,845
Due after ten years 3,077,645 2,996,866
Mortgage-backed securities 24,396,834 24,217,765
----------- -----------
$71,558,802 71,564,844
=========== ===========
Proceeds from sales of securities available for sale during 2000, 1999, and
1998 were $18,129,483, $6,896,296, and $7,616,174, respectively. Gross
gains of $39,788 and $168,448 for 1999 and 1998, respectively, along with
gross losses of $483,472 and $74,612 for 2000 and 1999, respectively, were
realized on those sales.
Securities with a carrying value of approximately $26,022,000 and
$20,113,000 at December 31, 2000 and 1999, respectively, were pledged to
secure public deposits and for other purposes as required by law.
(4) LOANS
Major classifications of loans at December 31, 2000 and 1999 are summarized
as follows:
2000 1999
------------ ------------
Commercial $ 96,881,936 83,644,317
Real estate - mortgage 229,260,731 190,920,815
Real estate - construction 58,938,765 39,339,857
Consumer 25,857,895 25,292,936
------------ ------------
Total loans 410,939,327 339,197,925
Less allowance for loan losses 4,713,227 3,924,348
------------ ------------
Total net loans $406,226,100 335,273,577
============ ============
The Company grants loans and extensions of credit primarily within the
Catawba Valley region of North Carolina which encompasses Catawba and
Alexander counties and portions of Iredell and Lincoln counties.
At December 31, 2000 and 1999, the Company had nonaccrual loans
approximating $5,421,000 and $2,866,000, respectively. In addition, the
Company had approximately $545,000 and $645,000 in loans past due more than
ninety days and still accruing interest at December 31, 2000 and 1999,
respectively. Interest income that would have been recorded on nonaccrual
loans for the years ended December 31, 2000, 1999, and 1998, had they
performed in accordance with their original terms, amounted to
approximately $508,000, $333,000, and $398,000, respectively. Interest
income on nonaccrual loans included in the results of operations for 2000,
1999 and 1998 amounted to approximately $94,000, $61,000, and $305,000,
respectively.
A-29
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) LOANS, CONTINUED
At December 31, 2000 and 1999, the recorded investment in loans that were
considered to be impaired under SFAS No. 114 was approximately $5,966,000
and $3,718,000, respectively, of which approximately $5,421,000 at December
31, 2000 and $2,866,000 at December 31, 1999 was on nonaccrual. The related
allowance for loan losses on these loans was approximately $925,000 and
$711,000 at December 31, 2000 and 1999, respectively. The average recorded
investment in impaired loans for the twelve months ended December 31, 2000
and 1999 was approximately $3,673,000 and $4,000,000, respectively. For the
years ended December 31, 2000, 1999, and 1998, the Company recognized
approximately $94,000, $61,000, and $264,000, respectively, of interest
income on impaired loans.
Changes in the allowance for loan losses were as follows:
2000 1999 1998
----------- ----------- ----------
Balance at beginning of year $3,924,348 4,136,690 4,374,641
Amounts charged off (1,158,381) (705,277) (746,280)
Recoveries on amounts previously charged off 68,160 67,935 63,329
Provision for loan losses 1,879,100 425,000 445,000
------------ ----------- ----------
Balance at end of year $4,713,227 3,924,348 4,136,690
============ =========== ==========
(5) PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2000 1999
----------- ----------
Land $ 3,300,561 2,655,024
Buildings and improvements 3,990,234 5,744,736
Furniture and equipment 7,278,731 7,751,921
----------- ----------
14,569,526 16,151,681
Less accumulated depreciation 6,310,895 7,679,383
----------- ----------
8,258,631 8,472,298
Construction in progress 4,649,337 870,284
----------- ----------
$12,907,968 9,342,582
=========== ==========
Depreciation expense was $1,139,330, $1,174,761, and $988,988 for the years
ended December 31, 2000, 1999, and 1998, respectively.
(6) DEPOSITS
At December 31, 2000, the scheduled maturities of certificates of deposit
are as follows:
2001 $ 208,205,223
2002 66,435,543
2003 4,137,017
2004 144,880
2005 and thereafter 529,378
-----------------
$ 279,452,041
=================
A-30
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) FEDERAL HOME LOAN BANK ADVANCES
The Bank has advances from the Federal Home Loan Bank ("FHLB") with monthly
interest payments at various maturity dates and interest rates ranging from
5.86% to 6.49% at December 31, 2000. The FHLB advances are collateralized
by a blanket assignment on all residential first mortgage loans that the
Bank owns.
Advances from the FHLB outstanding at December 31, 2000 mature as follows:
Year
----
2001 $ 4,000,000
2003 357,142
2005 5,000,000
2010 12,000,000
-------------
$ 21,357,142
=============
These borrowings are extended to the Bank under an extension of credit
equal to 20% of the Bank's total assets. The Bank is required to purchase
and hold certain amounts of FHLB stock in order to obtain FHLB borrowings.
No ready market exists for the FHLB stock, and it has no quoted market
value. The stock is redeemable at $100 per share subject to certain
limitations set by the FHLB. At December 31, 2000 and 1999 the Bank owned
FHLB stock amounting to approximately $1,206,000.
(8) INCOME TAXES
The provision for income taxes is summarized as follows:
2000 1999 1998
----------- ---------- ----------
Current $2,822,911 1,178,095 1,486,997
Deferred (246,511) 915,285 359,486
----------- ---------- ----------
$2,576,400 2,093,380 1,846,483
=========== ========== ==========
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to earnings before income
taxes are as follows:
2000 1999 1998
----------- ---------- ----------
Pre-tax income at statutory rates (34%) $2,704,656 2,256,010 1,990,932
Differences:
Tax exempt interest income (354,948) (343,143) (299,560)
Nondeductible interest and other expense 64,717 54,805 32,789
Other, net (22,229) 30,642 (1,349)
State taxes, net of federal benefit 184,204 95,066 123,671
----------- ---------- ----------
Total $2,576,400 2,093,380 1,846,483
=========== ========== ==========
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) INCOME TAXES, CONTINUED
The following summarizes the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities. The net deferred tax asset is included as a component of other
assets at December 31, 2000 and 1999.
2000 1999
----------- ---------
Deferred tax assets:
Allowance for loan losses $ 1,341,505 1,124,657
Amortizable intangible assets 228,305 199,584
Accrued retirement expense 103,599 245,784
Accrued contingent liabilities 83,644 85,098
Foreclosed real estate 24,669 25,098
Income from non-accrual loans 250,330 155,826
Unrealized loss on available for sale securities - 587,216
Other 9,076 41,308
----------- ---------
Total gross deferred tax assets 2,041,128 2,464,571
----------- ---------
Deferred tax liabilities:
Unrealized gain on available for sale securities 2,354 -
Deferred loan fees 1,187,215 1,200,305
Premises and equipment 150,744 219,430
Deferred income from servicing rights 349,278 374,737
Other 24,497 -
----------- ---------
Total gross deferred tax liabilities 1,714,088 1,794,472
----------- ---------
Net deferred tax asset $ 327,040 670,099
=========== =========
(9) RELATED PARTY TRANSACTIONS
The Company conducts transactions with its directors and executive
officers, including companies in which they have beneficial interests, in
the normal course of business. It is the policy of the Company that loan
transactions with directors and officers be made on substantially the same
terms as those prevailing at the time made for comparable loans to other
persons. The following is a summary of activity for related party loans for
2000:
Beginning balance $ 12,508,470
New loans 11,959,473
Repayments (13,338,580)
------------
Ending balance $ 11,129,363
============
At December 31, 2000 and 1999, the Company had deposit relationships with
related parties of $8,799,707 and $7,949,415, respectively.
(10) COMMITMENTS
The Company leases various office space for banking and operational
facilities under operating lease arrangements. Future minimum lease
payments required for all operating leases having a remaining term in
excess of one year at December 31, 2000 are as follows:
Year Amount
---- ------
2001 $ 323,972
2002 340,908
2003 340,908
2004 340,908
2005 300,480
Thereafter 1,155,750
---------------
Total minimum obligation $ 2,802,926
===============
A-32
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) COMMITMENTS, CONTINUED
Total rent expense was approximately $361,000, $262,000, and $249,000 for
2000, 1999, and 1998, respectively.
The Company 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, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet. The contract amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The 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 and financial guarantees written is represented
by the contractual amount of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
In most cases, the Company does require collateral or other security to
support financial instruments with credit risk.
Contractual Amount
-------------------
2000 1999
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 89,407,000 68,330,000
Standby letters of credit $ 2,208,000 4,006,000
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 may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit, or personal property.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
businesses in the Company's delineated trade area. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds real estate,
equipment, automobiles and customer deposits as collateral supporting those
commitments for which collateral is deemed necessary.
The Company has $11,000,000 available for the purchase of overnight federal
funds from two correspondent financial institutions.
(11) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS
The Company has a profit sharing and 401(k) plan for the use of
substantially all employees subject to certain minimum age and service
requirements. Under this plan, the Company matches employee contributions
to a maximum of five percent of annual compensation. The Company's
contribution pursuant to this formula was approximately $249,000, $163,000,
and $138,000, for the years of 2000, 1999, and 1998, respectively. The
Board of Directors elected not to make a discretionary contribution in
2000, 1999, or 1998. Investments of the plan are determined by the
compensation committee consisting of selected outside directors and senior
executive officers. No investments in Company stock have been made by the
plan. The vesting schedule for the plan begins at 20 percent after three
years of employment and graduates 20 percent each year until reaching 100
percent after seven years of employment.
A-33
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS, CONTINUED
The Company is currently paying medical benefits for certain retired
employees. Postretirement benefits, including amortization of the
transition obligation, were approximately $30,680, $28,830, and $25,250 for
the years ended December 31, 2000, 1999, and 1998, respectively. The
following table sets forth the accumulated postretirement benefit
obligation as of December 31, 2000 and 1999, which represents the liability
for accrued postretirement benefit costs:
2000 1999
-------------- ----------
Accumulated postretirement benefit obligation $ 194,598 179,815
Unrecognized transition obligation (34,819) (52,231)
Unrecognized gain (loss) (16,024) 2,029
-------------- ----------
Net liability recognized $ 143,755 129,613
============= =========
Effective May 13, 1999, the Company adopted an Omnibus Stock Ownership and
Long Term Incentive Plan (the "Plan") whereby certain stock-based rights,
such as stock options, restricted stock, performance units, stock
appreciation rights, or book value shares, may be granted to eligible
directors and employees. A total of 321,860 shares were reserved for
possible issuance under this Plan. All rights must be granted or awarded
within ten years from the effective date.
Under the Plan, the Company awarded 5,365 book value shares to each of its
ten directors with vesting for nine of the directors over a five year
period, effective September 28, 1999, and immediate vesting for one
director. Any recipient of book value shares shall have no rights as a
shareholder with respect to such book value shares. The intitial value of
the book value shares awarded during 1999 was determined to be $11.45 per
share. The Company recorded an expense of $32,601 and $3,414 associated
with the benefits of this plan in the years ended December 31, 2000 and
1999, respectively.
Also under the Plan, the Company granted incentive stock options to certain
eligible employees in order that they may purchase Company stock at a price
equal to the fair market value on the date of the grant. The options
granted in 1999 and 2000 vest over five and three year periods,
respectively, and expire after ten years. A summary of the activity in the
Plan is presented below:
2000 1999
--------------------- ---------------------
Weighted Weighted
Average Average
Option Price Option Price
Shares Per Share Shares Per Share
------ ------------- ------ -------------
Outstanding, beginning of year 27,657 $ 16.36 - -
Granted during the year 49,941 $ 12.69 27,657 $ 16.36
------ ------------- ------ -------------
Outstanding, end of year 77,598 $ 14.00 27,657 $ 16.36
====== ============= ====== =============
Number of shares exercisable 5,530 -
====== ======
The weighted average grant-date fair value of options granted in 2000 and
1999 was $6.24 and $6.48, respectively. Options outstanding at December 31,
2000 are exercisable at option prices of $16.36 and $12.69, as presented in
the table above. Such options have a weighted average remaining contractual
life of approximately 9 years.
A-34
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS, CONTINUED
The Plan is accounted for under Accounting Principles Board Opinion No. 25
and related interpretations. No compensation expense has been recognized
related to the grant of the incentive stock options. Had compensation cost
been determined based upon the fair value of the options at the grant
dates, the Company's net earnings and net earnings per share would have
been reduced to the proforma amounts indicated below.
2000 1999
---------- ---------
Net earnings As reported $5,378,470 4,541,945
Proforma $5,185,258 4,440,959
Basic earnings per share As reported $ 1.67 1.55
Proforma $ 1.61 1.52
Diluted earnings per share As reported $ 1.67 1.55
Proforma $ 1.61 1.52
The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2000 - dividend yield of 2.9%, risk free
interest rate of 5%, and an expected life of 10 years. For disclosure
purposes, the Company immediately recognized the expense associated with
the option grants assuming that all awards will vest.
(12) DERIVATIVE FINANCIAL INSTRUMENTS
Off-balance-sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures
and option contracts are available to the Company to assist in managing
interest rate risks. In 1998, the Company entered into an interest rate cap
to protect certain designated deposit accounts from the upward effects of
repricing in the event of an increasing rate environment. The total cost of
the interest rate cap arrangement was $21,600, which was expensed on a
straight-line basis for the life of the instrument. For the years ended
December 31, 2000, 1999, and 1998, the Company expensed $3,200, $22,944,
and $31,747, respectively, related to derivative financial instruments. The
Company had no off-balance-sheet derivative financial instruments at
December 31, 2000.
(13) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2000,
that Bancorp and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2000 the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
A-35
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) REGULATORY MATTERS, CONTINUED
The Company's and the Bank's actual capital amounts and ratios are
presented below. As of December 31, 1999, only the Bank's actual capital
amounts and ratios are presented as the consolidated ratios were not
materially different than the Bank's ratios.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions
---------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- --------
(dollars in thousands)
AS OF DECEMBER 31, 2000:
Total Capital (to Risk Weighted Assets)
Consolidated $47,412 11.22% 33,803 8.00% N/A N/A
Bank 46,464 11.02% 33,738 8.00% 42,172 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 42,699 10.11% 16,901 4.00% N/A N/A
Bank 41,751 9.90% 16,869 4.00% 25,303 6.00%
Tier 1 Capital (to Average Assets)
Consolidated 42,699 9.10% 18,768 4.00% N/A N/A
Bank 41,751 8.91% 18,751 4.00% 23,439 5.00%
AS OF DECEMBER 31, 1999:
Total Capital
(to Risk Weighted Assets) 42,319 12.11% 27,949 8.0% 34,937 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 38,395 10.99% 13,975 4.0% 20,962 6.0%
Tier 1 Capital
(to Average Assets) 38,395 9.21% 16,675 4.0% 20,843 5.0%
(14) SHAREHOLDERS' EQUITY
On June 12, 1998, the Company completed a public offering of 373,500 shares
of common stock at a price of $23.00 per share. The net proceeds of this
offering of $7,787,467 (after deducting issuance costs of $803,033) were
used to increase the Bank's regulatory capital ratios and for general
corporate purposes.
In April, 2000, the Company declared and distributed a 10% stock dividend
to its shareholders. On the date of distribution, certain shareholders,
representing 236 shares, were paid cash of $3,775 in lieu of fractional
shares. On February 11, 1999, the Board of Directors of the Company
declared a 3 for 2 stock split to be effected in the form of a 50% stock
dividend. On the date of distribution, 182 shares, representing all
fractional shares, were paid cash of $5,871 representing the February 22,
1999 market price. All share and per share amounts have been changed to
reflect the stock split and stock dividend as if it had occurred on
December 31, 1998.
On June 27, 2000, the Board of Directors of the Company approved the
Peoples Bancorp of North Carolina, Inc. Dividend Reinvestment and Stock
Purchase Plan. The Plan provides for the full or partial reinvestment of
cash dividends and optional cash purchases of the Company's stock. A total
of 200,000 shares were reserved for possible issuance and sale under this
Plan.
The Board of Directors, at its discretion, can issue shares of preferred
stock up to a maximum of 5,000,000 shares. The Board is authorized to
determine the number of shares, voting powers, designations, preferences,
limitations and relative rights.
The Board of Directors of the Bank may declare a dividend of all of its
retained earnings as it may deem appropriate, subject to the requirements
of the General Statutes of North Carolina, without prior approval from the
requisite regulatory authorities. As of December 31, 2000, this amount was
approximately $10,358,000.
A-36
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) OTHER OPERATING EXPENSE
Other operating expense for the years ended December 31 included the
following items that exceeded one percent of total revenues:
2000 1999 1998
-------- ------- -------
Telephone $379,801 353,536 358,506
Education and Consulting 164,750 366,488 214,918
Merchant Processing 502,085 459,682 -
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance sheet,
for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of the Company's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather a good faith
estimate of the increase or decrease in value of financial instruments held
by the Company since purchase, origination, or issuance.
Cash and Cash Equivalents
----------------------------
For cash, due from banks and federal funds sold, the carrying amount
is a reasonable estimate of fair value.
Investment Securities
----------------------
Fair values for investment securities are based on quoted market
prices.
Other Investments
------------------
The carrying amount of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
--------------------------------------------
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. For variable rate
loans, the carrying amount is a reasonable estimate of fair value.
Mortgage loans held for sale are valued based on the current price at
which these loans could be sold into the secondary market.
Interest Rate Contracts
-------------------------
The fair value of the interest rate contracts is obtained from dealer
quotes. This value represents the estimated amount the Company would
receive to terminate the agreement, taking into account current
interest rates and, when appropriate, the current credit worthiness of
the counterparty.
Mortgage Servicing Rights
---------------------------
Fair value of mortgage servicing rights is determined by estimating
the present value of the future net servicing income, on a
disaggregated basis, using anticipated prepayment assumptions.
Deposits and Demand Notes Payable
-------------------------------------
The fair value of demand deposits, interest-bearing demand deposits,
savings, and demand notes payable to U.S. Treasury is the amount
payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of
similar remaining maturities.
FHLB Borrowings
----------------
The fair value of FHLB borrowings is estimated based upon discounted
future cash flows using a discount rate comparable to the current
market rate for such borrowings.
Commitments to Extend Credit and Standby Letters of Credit
------------------------------------------------------------------
Because commitments to extend credit and standby letters of credit are
made using variable rates, the contract value is a reasonable estimate
of fair value.
A-37
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on many judgments. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
deferred income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The carrying amount and estimated fair values of the Company's
financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999
------------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ----------- -------- ----------
(In thousands) (In thousands)
Assets:
Cash and cash equivalents $ 18,639 18,639 16,997 16,997
Investment securities available for sale $ 71,565 71,565 62,498 62,498
Other investments $ 2,399 2,399 1,345 1,345
Loans $ 406,226 402,239 335,274 332,975
Mortgage loans held for sale $ 1,564 1,564 1,685 1,685
Mortgage servicing rights $ 920 920 970 970
Interest rate contracts $ - - 16 28
Liabilities:
Deposits and demand notes payable $ 451,673 467,512 378,234 386,030
FHLB advances $ 21,357 22,217 14,500 14,195
Unrecognized financial instruments:
Commitments to extend credit $ 89,407 89,407 68,330 68,330
Standby letters of credit $ 2,208 2,208 4,006 4,006
A-38
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of the unaudited condensed consolidated
quarterly operating results of the Company for the years ended December 31,
2000 and 1999:
2000 1999
------------------------------ ----------------------------
(in thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
------ ------ ------ ------ ----- ------ ----- ------
Total interest income $9,078 9,838 10,754 11,189 7,551 7,851 8,187 8,713
Total interest expense 4,015 4,428 5,176 5,813 3,653 3,600 3,656 3,881
------ ------ ------ ------ ----- ------ ----- ------
Net interest income 5,063 5,410 5,578 5,376 3,898 4,251 4,531 4,832
Provision for loan losses 257 523 640 459 - - 25 400
Other income 863 1,141 868 1,044 902 868 866 744
Other expense 3,793 4,040 3,731 3,945 3,218 3,434 3,719 3,461
------ ------ ------ ------ ----- ------ ----- ------
Income before income taxes 1,876 1,988 2,075 2,016 1,582 1,685 1,653 1,715
Income taxes 606 646 689 636 507 542 526 518
------ ------ ------ ------ ----- ------ ----- ------
Net income $1,270 1,342 1,386 1,380 1,075 1,143 1,127 1,197
====== ====== ====== ====== ===== ====== ===== ======
Net income per share $ 0.39 0.42 0.43 0.43 0.33 0.36 0.35 0.37
====== ====== ====== ====== ===== ====== ===== ======
(18) PEOPLES BANCORP OF NORTH CAROLINA, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
Assets
------
2000 1999
----------- ----------
Cash $ 152,939 -
Investment in Bank 42,091,437 37,998,479
Other investments 815,000 -
Deferred tax asset 19,056 -
----------- ----------
$43,078,432 37,998,479
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Accrued expenses $ 39,413 -
Shareholders' equity 43,039,019 37,998,479
----------- ----------
$43,078,432 37,998,479
=========== ==========
A-39
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) PEOPLES BANCORP OF NORTH CAROLINA, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---------- ---------
Dividends from Bank $2,327,019 1,082,738
Other operating expenses 191,519 -
---------- ---------
Earnings before income tax benefit and equity in
undistributed earnings of Bank 2,135,500 1,082,738
Income tax benefit 74,100 -
---------- ---------
Earnings before equity in undistributed
earnings of Bank 2,209,600 1,082,738
Equity in undistributed earnings of Bank 3,168,870 3,459,207
---------- ---------
Net earnings $5,378,470 4,541,945
========== =========
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ -----------
Cash flows from operating activities:
Net earnings $ 5,378,470 4,541,945
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of Bank (3,168,870) (3,459,207)
Provision for deferred taxes (19,056) -
Change in accrued expenses 39,413 5,871
------------ -----------
Net cash provided by operating activities 2,229,957 1,088,609
------------ -----------
Cash flows from investing activities consisting of the
purchase of other investments (815,000) -
------------ -----------
Cash flows from financing activities:
Cash paid in lieu of fractional shares (3,775) (5,871)
Dividends paid (1,258,243) (1,082,738)
------------ -----------
Net cash used by financing activities (1,262,018) (1,088,609)
------------ -----------
Net change in cash 152,939 -
Cash at beginning of year - -
Cash at end of year $ 152,939 -
============ ===========
A-40