SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only ( as permitted by Rule
14a-6 (e) (2))
[ X ] Definitive Proxy Statement
[ X ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
PEOPLES BANCORP OF NORTH CAROLINA, INC.
---------------------------------------
(Name of Registrant as Specified in Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing
by registration number, or the Form or Schedule and the date of
its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed:
-----------------------
PEOPLES BANCORP
OF NORTH CAROLINA, INC.
-----------------------
Notice of 2001 Annual Meeting,
Proxy Statement and
Annual Report
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PROXY STATEMENT
TABLE OF CONTENTS
Page
----
Notice of 2001 Annual Meeting of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . ii
Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Solicitation, Voting and Revocability of Proxies . . . . . . . . . . . . . . . . . . . . 1
Security Ownership of Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . 2
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . .. . . . . . . . . . . 5
Proposal 1 - Election of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Report of Compensation Committee. . . . . . . . . . . . .. . . . . . . . . . . . . . . . 17
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . 18
Report of Audit and Examining Committee . . . . . . . . . . . . . . .. . . . . . . . . . 18
Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Proposal 2 - Ratification of Selection of Independent Auditor . . . . . . . . . . . . . 20
Date for Receipt of Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . 20
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix A: Annual Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Description of the Business . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3
Management's Discussion and Analysis of Financial Condition and Results of Operations . . A-4
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . A-15
Market For the Company's Common Equity and Related Shareholder Matters . . . . . . . . . A-16
Directors and Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . A-17
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . A-18
Consolidated Balance Sheets - December 31, 2000 and 1999 . . . . . . . . . . . . . . . . A-19
Consolidated Statements of Earnings - For the Years Ended December 31, 2000,
1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-20
Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended
December 31, 2000, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . A-21
Consolidated Statements of Comprehensive Income - For the Years Ended
December 31, 2000, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . A-22
Consolidated Statements of Cash Flows - For the Years Ended December 31, 2000,
1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . A-25
Appendix B: Audit and Examining Committee Charter . . . . . . . . . . . . . . . . . . . . . B-1
PEOPLES BANCORP OF NORTH CAROLINA, INC.
POST OFFICE BOX 467
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658-0467
(828) 464-5620
NOTICE OF 2001 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 3, 2001
NOTICE IS HEREBY GIVEN that the 2001 Annual Meeting of Shareholders (the
"Meeting") of Peoples Bancorp of North Carolina, Inc. (the "Company") will be
held on Thursday, May 3, 2001, at 11:00 a.m., Eastern Time, at the Catawba
Country Club, 1154 Country Club Road, Newton, North Carolina.
The Meeting is for the purpose of considering and voting upon the following
matters:
1. To elect four persons who will serve as directors of the Company for
a three-year term expiring in 2004, or until their successors are
duly elected and qualified;
2. To ratify the selection of Porter Keadle Moore, LLP ("PKM") as the
independent auditor for the Company for the fiscal year ending
December 31, 2001; and
3. To transact such other business as may properly come before the
Meeting or any adjournments thereof. The board of directors of the
Company (the "Board of Directors") is not aware of any other
business to be considered at the Meeting.
The Board of Directors has established March 20, 2001 as the record date
for the determination of shareholders entitled to notice of and to vote at the
Meeting and at any adjournments thereof. In the event there are not sufficient
shares present in person or by proxy to constitute a quorum at the time of the
Meeting, the Meeting may be adjourned in order to permit further solicitation of
proxies by the Company.
By Order of the Board of Directors,
/s/ Tony W. Wolfe
Tony W. Wolfe
President and Chief Executive Officer
Newton, North Carolina
April 3, 2001
A FORM OF PROXY IS ENCLOSED TO ENABLE YOU TO VOTE YOUR SHARES AT THE MEETING.
YOU ARE URGED, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, TO COMPLETE, SIGN,
DATE AND RETURN THE PROXY PROMPTLY. A RETURN ENVELOPE, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR YOUR CONVENIENCE.
ii
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PROXY STATEMENT
2001 ANNUAL MEETING OF SHAREHOLDERS
MAY 3, 2001
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
GENERAL
This Proxy Statement is being furnished to shareholders of the Company in
connection with the solicitation by the Board of Directors of the Company of
proxies to be used at the Meeting to be held on Thursday, May 3, 2001, at 11:00
a.m., Eastern Time, at the Catawba Country Club, 1154 Country Club Road, Newton,
North Carolina, and at any adjournments thereof. This Proxy Statement and the
accompanying form of proxy were first mailed to shareholders on April 3, 2001.
The Company's principal executive offices are located at 518 West C Street,
Newton, North Carolina 28658, and its telephone number is (828) 464-5620.
Other than the matters listed on the attached Notice of 2001 Annual Meeting
of Shareholders, the Board of Directors knows of no matters that will be
presented for consideration at the Meeting. Execution of a proxy, however,
confers on the designated proxyholders discretionary authority to vote the
shares represented thereby in accordance with their best judgment on such other
business, if any, that may properly come before the Meeting or any adjournments
thereof.
REVOCABILITY OF PROXY
A proxy may be revoked at any time prior to its exercise by the filing of a
written notice of revocation with the Secretary of the Company, by delivering to
the Company a duly executed proxy bearing a later date, or by attending the
Meeting and voting in person. However, if you are a shareholder whose shares
are not registered in your own name, you will need appropriate documentation
from your recordholder to vote personally at the Meeting.
SOLICITATION
The cost of solicitation of proxies on behalf of the Board of Directors
will be borne by the Company. Proxies may be solicited personally or by
telephone by directors, officers and regular employees of the Company, without
additional compensation therefor. The Company will also request persons, firms
and corporations holding shares in their names, or in the name of their
nominees, which are beneficially owned by others to send proxy material to, and
obtain proxies from, such beneficial owners and will reimburse such holders,
upon request, for their reasonable out-of-pocket expenses in doing so.
VOTING SECURITIES AND VOTE REQUIRED FOR APPROVAL
Regardless of the number of shares of the Company's common stock (the
"Common Stock") owned, it is important that shareholders be represented by proxy
or be present in person at the Meeting. Shareholders are requested to vote by
completing the enclosed form of proxy and returning it signed and dated in the
enclosed postage-paid envelope. Any shareholder may vote for, against, or
withhold authority to vote on any matter to come before the Meeting. If the
enclosed proxy is properly completed, signed, dated and returned, and not
revoked, it will be voted in accordance with the instructions therein. If no
instructions are given, the proxy will be voted "FOR" the nominees for election
to the Board of Directors named in this Proxy Statement and "FOR" the
ratification of PKM as the Company's independent auditor for the fiscal year
ending December 31, 2001. If instructions are given with respect to one but not
both proposals, (i) such instructions as are given will be followed, and (ii)
the proxy will be voted "FOR" the proposal on which no instructions are given.
The securities which may be voted at the Meeting consist of shares of
Common Stock. The close of business on March 20, 2001 has been fixed by the
Board of Directors as the record date (the "Record Date") for the determination
of shareholders of record entitled to notice of and to vote at the Meeting and
any adjournments thereof. The total number of shares of Common Stock
outstanding on the Record Date was 3,218,714.
The presence, in person or by proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote at the Meeting is
necessary to constitute a quorum at the Meeting. Since many of our shareholders
cannot attend the Meeting, it is necessary that a large number be represented by
proxy. Accordingly, the Board of Directors has designated proxies to represent
those shareholders who cannot be present in person and who desire to be so
represented. In the event there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Meeting, the Meeting may be
adjourned in order to permit the further solicitation of proxies.
In the election of directors, persons must be nominated and elected for a
term to expire at the 2004 Annual Meeting of Shareholders. A nominee need only
receive a plurality of the votes cast in the election of directors in order to
be elected. As a result, those persons nominated who receive the largest number
of votes will be elected as directors. No shareholder has the right to
cumulatively vote his or her shares in the election of directors.
As to the ratification of the independent auditor, each share of Common
Stock shall entitle its owner to one vote and the affirmative vote of the
holders of a majority of the shares of Common Stock present at the Meeting, in
person or by proxy and entitled to vote, is required to constitute shareholder
approval of the proposal.
Proxies solicited hereby will be returned to the Board of Directors, and
will be tabulated by one or more inspectors of election designated by the Board
of Directors. Abstentions will be counted for purposes of determining whether a
quorum is present at the Meeting. Abstentions will not be counted in tabulating
the votes cast on any proposal submitted to the shareholders. Broker non-votes
will not be counted either for determining the existence of a quorum or for
tabulating votes cast on any proposal.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires that any person who acquires the beneficial ownership of more than five
percent of the Common Stock notify the Securities and Exchange Commission (the
"SEC") and the Company. Following is certain information, as of the Record
Date, regarding those persons or groups who held of record or who are known to
the Company to own beneficially, more than five per cent of the outstanding
Common Stock:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS(2)
---------------------- ----------------------- -----------
Christine S. Abernethy 331,312(3,4) 10.29%
P.O. Box 820
Newton, NC 28658
<FN>
- ---------------------------
(1) Unless otherwise noted, all shares are owned directly of record by the
named individuals, by their spouses and minor children, or by other
entities controlled by the named individuals. Voting and investment power
is not shared unless otherwise indicated.
(2) Based upon a total of 3,218,714 shares of Common Stock outstanding as of
the Record Date.
(3) Carolina Glove Company, Inc. has acquired 56,378 shares of Common Stock.
Ms. Abernethy owns approximately 50% of the stock of Carolina Glove
Company, Inc. The business is operated by a family committee. Ms. Abernethy
has no active day-to-day participation in the business affairs of Carolina
Glove Company, Inc.
(4) Based upon the Form 4 filed by Ms. Abernethy on March 8, 2001.
2
Set forth below is certain information, as of the Record Date, regarding
those shares of Common Stock owned beneficially by each of the members of the
Board of Directors and the named executive officers of the Company (including
nominees for election at the Meeting), and the directors and executive officers
of the Company as a group.
AMOUNT AND
NATURE OF PERCENTAGE
BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP(1) CLASS(2)
- --------------------- ------------ ----------
James S. Abernethy 64,292 2.00%
Post Office Box 327
Newton, NC 28658
Robert C. Abernethy 108,559 (3) 3.37%
Post Office Box 366
Newton, NC 28658
Joseph F. Beaman, Jr. 2,492 (4) *
Post Office Box 467
Newton, NC 28658
William D. Cable 1,516 (5) *
Post Office Box 467
Newton, NC 28658
Bruce R. Eckard 19,236 *
Post Office Box 563
Conover, NC 28613
John H. Elmore, Jr. 26,887 *
Post Office Box 445
Catawba, NC 28609
B. E. Matthews 13,128 *
210 First Avenue South
Conover, NC 28613
Gary E. Matthews 1,479 *
210 First Avenue South
Conover, NC 28613
Charles F. Murray 55,545 (6) 1.73%
Post Office Box 1118
Claremont, NC 28610
Larry E. Robinson 19,972 (7) *
Post Office Box 723
Newton, NC 28658
Lance A. Sellers 538 (8) *
Post Office Box 467
Newton, NC 28658
Fred L. Sherrill, Jr. 14,059 (9) *
Post Office Box 816
Conover, NC 28613
Dan Ray Timmerman, Sr. 23,679 *
Post Office Box 1148
Conover, NC 28613
3
AMOUNT AND
NATURE OF PERCENTAGE
BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP(1) CLASS(2)
- --------------------- ------------ ----------
Clifton A. Wike 1,778 (10) *
Post Office Box 467
Newton, NC 28658
Tony W. Wolfe 3,749 (11) *
Post Office Box 467
Newton, NC 28658
Benjamin I. Zachary 4,928 *
Post Office Box 277
Taylorsville, NC 28681
All current directors and
nominees and executive officers
as a group (16 people) 361,838(12) 11.24%
*Does not exceed one percent of the Common Stock outstanding.
<FN>
______________________________________________
1 Unless otherwise noted, all shares are owned directly of record by the
named individuals, by their spouses and minor children, or by other
entities controlled by the named individuals. Voting and investment power
is not shared unless otherwise indicated.
2 Based upon a total of 3,218,714 shares of Common Stock outstanding as of
the Record Date.
3 Includes 2,397 shares of Common Stock owned by Mr. Abernethy's spouse, for
which Mr. Abernethy disclaims beneficial ownership.
4 Includes 859 shares of Common Stock in which Mr. Beaman has the right to
acquire beneficial interest within 60 days by the exercise of stock options
granted under the Omnibus Stock Ownership and Long Term Incentive Plan.
5 Includes 196 shares of Common Stock in which Mr. Cable has the right to
acquire beneficial interest within 60 days by the exercise of stock options
granted under the Omnibus Stock Ownership and Long Term Incentive Plan.
6 Includes 882 shares of Common Stock owned by Mr. Murray's spouse, for which
Mr. Murray disclaims beneficial ownership.
7 Includes 1,170 shares of Common Stock owned by Mr. Robinson's spouse, for
which Mr. Robinson disclaims beneficial ownership.
8 Includes 538 shares of Common Stock in which Mr. Sellers has the right to
acquire beneficial interest within 60 days by the exercise of stock options
granted under the Omnibus Stock Ownership and Long Term Incentive Plan.
9 Includes 5,690 shares of Common Stock owned by Mr. Sherrill's spouse, for
which Mr. Sherrill disclaims beneficial ownership.
10 Includes 400 shares of Common Stock in which Mr. Wike has the right to
acquire beneficial interest within 60 days by the exercise of stock options
granted under the Omnibus Stock Ownership and Long Term Incentive Plan.
11 Includes 1,431 shares of Common Stock in which Mr. Wolfe has the right to
acquire beneficial interest within 60 days by the exercise of stock options
granted under the Omnibus Stock Ownership and Long Term Incentive Plan.
12 Includes 3,424 shares of Common Stock in which the executive officers, as a
group, have the right to acquire beneficial interest within 60 days by the
exercise of stock options granted under the Omnibus Stock Ownership and
Long Term Incentive Plan.
Directors James S. Abernethy and Robert C. Abernethy are brothers and sons of
Christine S. Abernethy, who owns in excess of 10% of the Common Stock. Directors
Bruce R. Eckard and Fred L. Sherrill, Jr. are first cousins by marriage.
Director nominee Gary E. Matthews is the son of director B.E. Matthews, who is
retiring from the Board of Directors effective immediately following the
Meeting.
4
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of the Common Stock, to
file reports of ownership and changes in ownership with the SEC. Executive
officers, directors and greater than ten percent beneficial owners are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representations from the Company's executive officers and
directors, the Company believes that during the fiscal year ended December 31,
2000, its executive officers and directors and greater than ten percent
beneficial owners complied with all applicable Section 16(a) filing
requirements.
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES
The Bylaws of the Company provide that the number of directors of the
Company shall not be less than five nor more than fifteen. The exact number of
directors is fixed by the Board of Directors. The Board of Directors has
currently fixed the size of the Board at ten members.
The Board of Directors has nominated the four persons named below for
election as directors to serve for a three-year term to expire at the 2004
annual meeting of shareholders or until their earlier death, resignation,
retirement, removal or disqualification or until their successors shall be
elected and shall qualify.
The persons named in the accompanying form of proxy intend to vote any
shares of Common Stock represented by valid proxies received by them to elect
the four nominees listed below as directors for the terms specified, unless
authority to vote is withheld or such proxies are duly revoked. All but one of
the nominees for election is currently a member of the Board of Directors whose
term expires in 2001. In the event that any of the nominees should become
unavailable to accept nomination or election, it is intended that the
proxyholders will vote to elect in his stead such other person as the present
Board of Directors may recommend. The Board of Directors has no reason to
believe that any of the nominees named herein will be unable to serve if elected
to office.
The Company's bylaws provide that, in order to be eligible for
consideration at the annual meeting of shareholders, all nominations of
directors, other than those made by the Board of Directors, must be made in
writing and must be delivered to the Secretary of the Company not less than 30
days nor more than 50 days prior to the meeting at which such nominations will
be made; provided, however, if less than 21 days notice of the meeting is given
to shareholders, such nominations must be delivered to the Secretary of the
Company not later than the close of business on the seventh day following the
day on which the notice of meeting was mailed.
5
The following table sets forth as to each nominee, his name, age, principal
occupation during the last five years, and the year he was first elected as a
director.
AGE ON PRINCIPAL OCCUPATION DIRECTOR
NAME DECEMBER 31,2000 DURING LAST FIVE YEARS SINCE
- ------ ---------------- -------------------------------- --------
Bruce R. Eckard 54 President, Eckard Vending Company, Inc. 1994
(vending machine servicer)
Gary E. Matthews 45 President and Director, Matthews --
Construction Company, Inc.
Dan Ray Timmerman, Sr 53 President, Timmerman Manufacturing, Inc. 1995
(wrought iron furniture manufacturer)
Benjamin I. Zachary 44 General Manager, Treasurer 1995
Secretary and member of the Board
of Directors, Alexander Railroad Company
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE ABOVE-LISTED
---
NOMINEES FOR ELECTION AS DIRECTORS. THE FOUR NOMINEES RECEIVING THE HIGHEST
NUMBER OF VOTES SHALL BE DEEMED TO HAVE BEEN ELECTED.
The following table sets forth as to each continuing director of the Bank,
his name, age, principal occupation during the last five years, the year he was
first elected as a director, and the year his current term expires.
AGE ON PRINCIPAL OCCUPATION DIRECTOR TERM
NAME DECEMBER 31, 2000 DURING LAST FIVE YEARS SINCE EXPIRES
- ---------- ----------------- ------------------------------------------- -------- -------
John H. Elmore, Jr. 58 Chairman of the Board, Chief Executive 1974 2002
Officer and Treasurer, Elmore
Construction Company, Inc.
Charles F. Murray 57 President, Murray's Hatchery, Inc. 1990 2002
Fred L. Sherrill, Jr. 66 Retired (furniture manufacturer executive) 1989 2002
Robert C. Abernethy 50 President, Secretary and Treasurer, 1976 2003
Carolina Glove Company, Inc. (glove
manufacturer); Secretary and Assistant
Treasurer, Midstate Contractors, Inc.
(paving company)
James S. Abernethy 46 Vice President, Carolina Glove Company, 1992 2003
Inc. (glove manufacturer); President and
Assistant Secretary, Midstate Contractors,
Inc. (paving company); Vice President,
Assistant Secretary and Chairman of the
Board of Directors, Alexander Railroad
Company
Larry E. Robinson 55 President and Chief Executive Officer, 1993 2003
Blue Ridge Distributing Co., Inc. (beer
and wine distributor); President and Chief
Executive Officer, Associated Brands, Inc.
(beer and wine distributor)
6
BOARD OF DIRECTORS OF THE BANK
Peoples Bank (the "Bank") currently has a ten-member board of directors
comprised of all of the same people who are currently directors of the Company.
MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD
The Bank's board of directors is scheduled to meet every other month or as
needed. The Board of Directors and the Bank's board of directors met a total of
eight times during the fiscal year ended December 31, 2000. During the year
ended December 31, 2000, all members of the Board of Directors attended at least
75% of the aggregate number of meetings of the Board of Directors, the Bank's
board of directors and committees of both boards on which they served.
The Board of Directors has one standing committee - the Auditing and
Examining Committee. The Audit and Examining Committee consists of Directors R.
Abernethy, Matthews, Murray, Robinson, Sherrill, and Zachary. These members are
believed to be independent as that term is defined in Rule 4200(a)(15) of the
NASD's listing standards. The Audit Committee meets as needed and, among other
responsibilities, oversees (i) the internal independent auditing of the Company;
(ii) the system of internal controls that management has established; and (iii)
the quarterly and annual financial information to be provided to shareholders
and the Securities and Exchange Commission. The Audit and Examining Committee
met five times during the fiscal year ended December 31, 2000.
BANK BOARD COMMITTEES
The Bank's board of directors has several standing committees, including
the Compensation Committee, Executive and Loan Committee and Strategic Planning
Committee.
The Bank's Compensation Committee consists of Directors R. Abernethy,
Eckard, Elmore, Robinson, Sherrill, and Timmerman. The Committee reviews and
approves the recommendation of the President and Chief Executive Officer for the
compensation of the executive officers and makes recommendations to the Board of
Directors for the compensation of the President and Chief Executive Officer.
The Committee also makes recommendations to the Board of Directors regarding the
adoption of and amendments to employee benefit plans and amendments to the
salary administration plan. The Committee met three times during the fiscal
year ended December 31, 2000.
The Executive and Loan Committee has six members, Directors J. Abernethy,
R. Abernethy, Eckard, Robinson, Timmerman and Zachary. The Committee conducts
loan reviews and approves loans, monitors the overall operations of the Bank,
and has the power to act on behalf of the full Board of Directors in the absence
of a meeting of the entire Board of Directors. The Committee met eleven times
during the fiscal year ended December 31, 2000.
The Strategic Planning Committee has five members, Directors J. Abernethy,
R. Abernethy, Eckard, Murray, and Sherrill. The Committee's duties include the
investigation of and recommendations for future branching sites, discussion of
matters of general, strategic corporate direction, discussion of capital
expenses associated with technology, and recommending director nominations to
the full Board of Directors. The Committee met six times during the fiscal year
ended December 31, 2000.
DIRECTOR COMPENSATION
Directors' Fees. Members of the Board of Directors receive no fees or
compensation for their service. However, all members of the Board of Directors
are also directors of the Bank and are compensated for that service. Through
September 25, 2000, directors received a fee of $400 for each Bank board of
directors meeting attended. An additional fee of $150 was paid to committee
members for each committee meeting attended, with the exception of the Executive
and Loan Committee for which a fee of $250 was paid to committee members for
each meeting attended. On September 25, 2000, the $400 fee for Board meeting
attendance was increased to $500, the $150 fee for committee
7
meeting attendance was increased to $200, and the $250 fee for Executive and
Loan Committee attendance was increased to $300. In addition to these meeting
fees, each director also received an annual retainer of $7,200.
Service awards were made under the Service Recognition Plan for directors,
officers and employees to two members of the Board of Directors in 2000. Mr.
Timmerman and Mr. Zachary received Common Stock having a value of $238.50 and
$86.50 in cash for five years of service.
Members of the Board of Directors are eligible to participate in the
Company's Omnibus Stock Ownership and Long Term Incentive Plan (the "Stock
Benefits Plan"). Each director has been awarded 5,365 book value shares under
the Stock Benefits Plan. At the time of the award, September 28, 1999, the book
value of the Common Stock was $11.45 (adjusted to reflect the April 24, 2000 10%
stock dividend). Excepting book value shares awarded to B.E. Matthews, which
vested 100% on the award date, 20% of the book value shares awarded to directors
under the Stock Benefits Plan vested on September 28, 2000, and the remainder
will vest 20% annually on September 28 until all book value shares are vested on
September 28, 2004. See "-- Management Compensation - Stock Benefits Plan" for
a description of the plan. No awards were made to directors under the plan
during 2000.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who are executive officers of either the Company or the Bank, or both.
AGE ON EMPLOYED BY THE
DECEMBER 31, POSITIONS AND OCCUPATIONS COMPANY OR THE
NAME 2000 DURING LAST FIVE YEARS BANK SINCE
- --------------------- ------------- --------------------------------------------- ---------------
Tony W. Wolfe 54 President and Chief Executive Officer of the 1990
Company and the Bank
Joseph F. Beaman, Jr. 51 Executive Vice President, Chief Financial 1977
Officer, and Corporate Secretary of the
Company and the Bank
Clifton A. Wike 51 Bank Senior Vice President - Lending 1972
William D. Cable 32 Bank Senior Vice President - Information 1995
Services; Vice President - Internal Auditor
of the Bank from October 1995 to April
1998
Lance A. Sellers 38 Bank Executive Vice President - Credit 1998
Administration, Mortgage Lending and
Commercial Banking; prior to 1999
Bank Senior Vice President - Credit
Administration; prior to August 1998 Senior
Credit Officer at a large North Carolina bank
MANAGEMENT COMPENSATION
The executive officers of the Company are not paid any cash compensation by
the Company. However, the executive officers of the Company also are executive
officers of the Bank and receive compensation from the Bank.
The following table shows, for the fiscal years ended December 31, 2000,
1999 and 1998, the cash compensation received by, as well as certain other
compensation paid or accrued for those years, the Bank's Chief Executive Officer
and the Bank's executive officers whose total annual salary and bonus exceeded
$100,000.
8
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------------------------ ----------------------------------
SECURITIES UNDERLYING
RESTRICTED OPTIONS/STOCK
NAME AND OTHER ANNUAL STOCK APPRECIATION RIGHTS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS ("SARS") (IN SHARES)
- ----------------------------------------- -------- ----------- -------- --------------- ---------- ----------------------
Tony W. Wolfe 2000 $ 185,866 $60,011(7) $ - - - - 17,179/0 (9)
President and Chief Executive Officer 1999 162,818 15,193 - - - - 0/0 (10)
of the Company and the Bank 1998 146,510 27,168 - - - - - -
Joseph F. Beaman, Jr. 2000 $ 137,460 $ 39,787 $ - - - - 10,059/0 (9)
Executive Vice President, Chief Financial 1999 115,647 20,063 - - - - 0/0 (10)
Officer, and Corporate Secretary 1998 108,960 16,615 - - - - - -
of the Company and the Bank
Lance A. Sellers 2000 $ 115,658 $ 33,355 $ - - - - 7,132/0 (9)
Executive Vice President - Credit 1999 112,068 16,610 - - - - 0/0 (10)
Administration, Mortgage Lending and 1998 36,827 4,370 - - - - - -
Commercial Banking of the Bank
Clifton A. Wike 2000 $ 98,593 $ 23,134 $ - - - - 4,655/0 (9)
Senior Vice President - Lending 1999 95,200 8,055 - - - - 0/0 (10)
of the Bank 1998 87,823 13,109 - - - - - -
William D. Cable 2000 $ 91,447 $19,482(8) $ - - - - 3,433/0 (9)
Senior Vice President - Information 1999 82,115 10,732 - - - - 0/0 (10)
Services of the Bank 1998 73,600 8,564 - - - - - -
ALL OTHER COMPENSATION (2,3,4,5,6)
----------------------------------
NAME AND
PRINCIPAL POSITION
- -----------------------------------------
Tony W. Wolfe $ 9,948
President and Chief Executive Officer 9,579
of the Company and the Bank 8,802
Joseph F. Beaman, Jr. $ 8,716
Executive Vice President, Chief Financial 8,088
Officer, and Corporate Secretary 7,408
of the Company and the Bank
Lance A. Sellers $ 5,829
Executive Vice President - Credit 175
Administration, Mortgage Lending and 29
Commercial Banking of the Bank
Clifton A. Wike $ 5,227
Senior Vice President - Lending 5,256
of the Bank 4,734
William D. Cable $ 4,574
Senior Vice President - Information 4,113
Services of the Bank 3,746
<FN>
- ------------------------
1 Perquisites for the fiscal year did not exceed the lesser of $50,000, or
10% of salary and bonus as reported for the named employee.
2 For Mr. Wolfe, includes for 2000: $9,082 under the 401(k) plan and a $866
premium paid for group term life insurance in excess of $50,000; for 1999:
$8,365 under the 401(k) plan and a $1,214 premium paid for group term life
insurance in excess of $50,000; for 1998: $7,339 under the 401(k) plan and
a $1,463 premium paid for group term life insurance in excess of $50,000.
3 For Mr. Beaman, includes for 2000: $8,120 under the 401(k) plan and a $596
premium paid for group term life insurance in excess of $50,000; for 1999:
$7,271 under the 401(k) plan and a $817 premium paid for group term life
insurance in excess of $50,000; for 1998:$6,768 under the 401(k) plan and a
$640 premium paid for group term life insurance in excess of $50,000.
4 For Mr. Sellers, includes for 2000: $5,639 under the 401(k) plan and a $190
premium paid for group term life insurance in excess of $50,000; for 1999:
$0 under the 401(k) plan and a $175 premium paid for group term life
insurance in excess of $50,000; for 1998: a premium paid for group term
life insurance in excess of $50,000.
5 For Mr. Wike, includes for 2000: $4,830 under the 401(k) plan and a $397
premium paid for group term life insurance in excess of $50,000; for 1999:
$4,673 under the 401(k) plan and a $583 premium paid for group term life
insurance in excess of $50,000; for 1998: $4,310 under the 401(k) plan and
a $424 premium paid for group term life insurance in excess of $50,000.
6 For Mr. Cable, includes for 2000: $4,450 under the 401(k) plan and a $124
premium paid for group term life insurance in excess of $50,000; for 1999:
$4,000 under the 401(k) plan and a $113 premium paid for group term life
insurance in excess of $50,000; for 1998: $3,638 under the 401(k) plan and
a $108 premium paid for group term life insurance in excess of $50,000.
7 Includes $159.75 in cash and $490.25 in Common Stock awarded to Mr. Wolfe
on December 2, 2000, pursuant to the Service Recognition Plan. The per
share fair market value of the Common Stock on December 2, 2000 was $12.71.
8 Includes $86.50 in cash and $238.50 in Common Stock awarded to Mr. Cable on
December 2, 2000, pursuant to the Service Recognition Plan. The per share
fair market value of the Common Stock on December 2, 2000 was $12.71.
9 Includes 7,157, 4,294, 2,688, 2,000, and 978 shares subject to option
(adjusted to reflect the April 24, 2000 10% stock dividend) granted, on
September 28, 1999, to Mr. Wolfe, Mr. Beaman, Mr. Sellers, Mr. Wike and Mr.
Cable, respectively. These options, granted pursuant to the Omnibus Plan,
entitle Messrs. Wolfe, Beaman, Sellers, Wike and Cable to purchase at any
time after vesting and before September 28, 2009, shares of Common Stock in
exchange for an exercise price of $ 16.36 per share, which was the fair
market per share value of the Common Stock on the date of grant (adjusted
to reflect the April 24, 2000 10% stock dividend). Of these options granted
to Messrs. Wolfe, Beaman, Sellers, Wike and Cable, 20% of the options
vested on September 28, 2000 and 20% will vest each year thereafter with
the last 20% vesting on September 28, 2004. Also, includes 10,022, 5,765,
4,444, 2,655, and 2,455 shares subject to option granted, on September 25,
2000, to Mr. Wolfe, Mr. Beaman, Mr. Sellers, Mr. Wike and Mr. Cable,
respectively. These options, granted pursuant to the Omnibus Plan, entitle
Messrs. Wolfe, Beaman, Sellers, Wike and Cable to purchase at any time
after vesting and before September 25, 2010, shares of Common Stock in
exchange for an exercise price of $12.69 per share, which was the fair
market per share value of the Common Stock on the date of grant. Of these
options granted to Messrs. Wolfe, Beaman, Sellers, Wike and Cable,
one-third of the options vest on September 25, 2001, one-third on September
25, 2002 and the final third on September 25, 2003. All options become 100%
vested upon death, disability or a change in control of the Bank.
10 The options granted in 1999 were repriced as a result of the April 24, 2000
10% stock dividend and are therefore disclosed in the 2000 stock option
grants as described in footnote 9.
9
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with Tony W. Wolfe,
President and Chief Executive Officer, Joseph F. Beaman, Jr., Executive Vice
President, Chief Financial Officer and Corporate Secretary, Lance A. Sellers,
Bank Executive Vice President - Credit Administration, Mortgage Lending and
Commercial Banking, Clifton A. Wike, Bank Senior Vice President/Lending, and
William D. Cable, Bank Senior Vice President/Information Services, in order to
establish their duties and compensation and to provide for their continued
employment with the Bank. The agreements provide for an initial term of
employment of three years. Commencing on the first anniversary date and
continuing on each anniversary date thereafter, unless notice of a non-extension
is given by either party, each agreement is automatically extended for an
additional year so that the remaining term shall always be no less than two and
no more than three years. The agreements also provide that the base salary
shall be reviewed by the Board of Directors not less often than annually. In
addition, the employment agreements provide for discretionary bonuses and
participation in other management incentive, pension, profit-sharing, medical or
retirement plans maintained by the Bank, as well as fringe benefits normally
associated with such employee's office. Mr. Wolfe's agreement provides for a
company automobile and Mr. Beaman's agreement provides for a monthly automobile
allowance. The employment agreements provide that they may be terminated by the
Bank for cause, as defined in the agreements, and that they may otherwise be
terminated by the Bank (subject to vested rights) or by the employee.
In the event of a change in control, the term of the employment agreements
shall be automatically extended for three years from the date of the change of
control. For purposes of the employment agreement, a change in control generally
will occur if (i) any "person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act), other than a person who beneficially owned as of January
1, 1998, more than 5% of the Bank's securities, acquires beneficial ownership of
voting stock and irrevocable proxies representing 20% or more of any class of
voting securities of either the Company or the Bank, (ii) the election of
directors constituting more than one-half of the Board of Directors of the
Company or the Bank who, prior to their election, were not nominated for
election or approved by at least three-fourths of the Board of Directors of the
Company as then constituted; (iii) either the Company or the Bank consolidates
or merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Company nor the Bank, respectively, is
the surviving corporation in the transaction; or (iv) all or substantially all
of the assets of either the Company or the Bank are sold or otherwise
transferred to or acquired by any other entity or group.
In addition, the employee may voluntarily terminate his employment at any
time following a change in control and continue to receive his base salary for
the remainder of the term of the employment agreement, if, after the change in
control, (i) the employee is assigned duties and/or responsibilities that are
inconsistent with his position prior to the change in control or that are
inconsistent with his reporting responsibilities at that time, (ii) the
employee's compensation or benefits are reduced, or (iii) the employee is
transferred to a location which is an unreasonable distance from his current
principal work location without his consent.
An additional eleven middle management officers have been granted
employment agreements for two-year terms. Those employment agreements contain
provisions similar to those discussed above.
STOCK BENEFITS PLAN
General. The Board of Directors has implemented the Omnibus Stock
Ownership and Long Term Incentive Plan (the "Omnibus Plan") which was approved
by the Company's shareholders on May 13, 1999. The purpose of the Omnibus Plan
is to promote the interests of the Company by attracting and retaining directors
and employees of outstanding ability and to provide executive and other key
employees of the Company and its subsidiaries greater incentive to make material
contributions to the success of the Company by providing them with stock-based
compensation which will increase in value based upon the market performance of
the Common Stock and/or the corporate achievement of financial and other
performance objectives.
The Omnibus Plan is administered by the Compensation Committee of the Board
of Directors (the "Committee"). Subject to the terms of the Omnibus Plan, the
Committee and the Board of Directors has authority to
10
construe and interpret, for eligible employees and eligible directors,
respectively, the Omnibus Plan, to determine the terms and provisions of Rights
(as defined below) to be granted under the Omnibus Plan, to define the terms
used in the Omnibus Plan and in the Rights granted thereunder, to prescribe,
amend and rescind rules and regulations relating to the Omnibus Plan, to
determine the individuals to whom and the times at which Rights shall be granted
and the number of shares to be subject to, or to underlie, each Right awarded,
and to make all other determinations necessary or advisable for the
administration of the Omnibus Plan.
Rights Which May Be Granted. Under the Omnibus Plan, the Committee may
grant or award eligible participants Options, rights to receive restricted
shares of Common Stock, long term incentive units (each equivalent to one share
of Common Stock), SARs, and/or Book Value Shares. These grants and awards are
referred to herein as the "Rights." All Rights must be granted or awarded by
March 30, 2009, the tenth anniversary of the date the Board of Directors adopted
the Omnibus Plan. Rights representing 321,860 shares of Common Stock (adjusted
to reflect the April 24, 2000 10% stock dividend) may be awarded under the
Omnibus Plan.
Options. Options granted under the Omnibus Plan to eligible directors and
employees may be either incentive stock options ("ISOs") or non-qualified
options ("NSOs"). The exercise price of an Option may not be less than 100% of
the last-transaction price for the Common Stock quoted by the Nasdaq National
Market on the date of grant.
The Committee shall determine the expiration date of each Option granted,
up to a maximum of ten years from the date of grant. In the Committee's
discretion, it may specify the period or periods of time within which each
Option will first become exercisable, which period or periods may be accelerated
or shortened by the Committee.
Each Option granted will terminate upon the expiration date established by
the Committee or upon the earlier of (i) twelve months after the holder ceases
to be an eligible employee or director by reason of death or disability, and
(ii) immediately as of the date the holder is no longer an eligible employee or
director for any reason other than death or disability. In the event of a
change in control (as that term is defined in the Omnibus Plan), any unvested
options granted under the Omnibus Plan will immediately and automatically vest.
Restricted Stock. The Committee may award Rights to acquire shares of
Common Stock subject to certain transfer restrictions ("Restricted Stock") to
eligible participants under the Omnibus Plan for such purchase price per share,
if any, as the Committee, in its discretion, may determine appropriate. The
Committee shall determine the expiration date for each Restricted Stock award,
up to a maximum of ten years from the date of grant. In the Committee's
discretion, it may specify the period or periods of time within which each
Restricted Stock award will first become exercisable, which period or periods
may be accelerated or shortened by the Committee.
Awards of Restricted Stock shall terminate in the same manner as described
above in connection with the termination of Options.
Units. Under the Omnibus Plan, the Committee may grant to eligible
directors and employees awards of long term incentive units, each equivalent in
value to one share of Common Stock ("Units"). Except as otherwise provided,
Units awarded may be distributed only after the end of a performance period of
two or more years, as determined by the Committee, beginning with the year in
which the awards are granted.
The percentage of the Units awarded that are to be distributed will depend
on the level of financial and other performance achieved by the Company during
the performance period. The Committee may adopt one or more performance
categories in addition to, or in substitution for, a performance category or may
eliminate all performance categories other than financial performance. All
performance categories other than financial performance may not be applied in
the aggregate as a factor of more than one against financial performance.
As soon as practicable after each performance period, the percentage of
Units awarded that are to be distributed, based on the levels of performance
achieved, will be determined and distributed to the recipients of such awards in
the
11
form of a combination of shares of Common Stock and cash. Units awarded, but
which the recipients are not entitled to receive, will be cancelled.
In the event of the death or disability of a Unit recipient prior to the
end of any performance period, the number of Units awarded for such performance
period will be reduced in proportion to the number of months remaining in the
performance period after the date of death or disability; and the remaining
portion of the award, if any, may, in the discretion of the Committee, be
adjusted based upon the levels of performance achieved prior to the date of
death or disability, and distributed within a reasonable time after death or
disability. In the event a recipient of Units ceases to be an eligible director
or employee for any reason other than death or disability, all Units awarded,
but not yet distributed, will be cancelled.
In the event of a change in control (as that term is defined in the Omnibus
Plan), any outstanding Units will immediately and automatically be reduced as
appropriate to reflect a shorter performance period.
An amount equal to the dividend payable on one share of Common Stock (a
"dividend equivalent credit") will be determined and credited on the payment
date to each Unit recipient's account for each Unit awarded and not yet
distributed or cancelled. Such amount will be converted within the account to
an additional number of Units equal to the number of shares of Common Stock
which could be purchased at the last-transaction price of the Common Stock on
the Nasdaq National Market on the dividend payment date.
No dividend equivalent credits or distribution of Units may be credited or
made if, at the time of crediting or distribution, (i) the regular quarterly
dividend on the Common Stock has been omitted and not subsequently paid or there
exists any default in payment of dividends on any such outstanding shares of
Common Stock;(ii) the rate of dividends on the Common Stock is lower than at
the time the Units to which the dividend equivalent credit relates were awarded,
adjusted for certain changes; (iii) estimated consolidated net income of the
Company for the twelve-month period preceding the month the dividend equivalent
credit or distribution would otherwise have been made is less than the sum of
the amount of the dividend equivalent credits and Units eligible for
distribution under the Omnibus Plan in that month plus all dividends applicable
to such period on an accrual basis, either paid, declared or accrued at the most
recently paid rate, on all outstanding shares of Common Stock; or (iv) the
dividend equivalent credit or distribution would result in a default in any
agreement by which the Company is bound.
If an extraordinary event occurs during a performance period which
significantly alters the basis upon which the performance levels were
established, the Committee may make adjustments which it deems appropriate in
the performance levels. Such events may include changes in accounting
practices, tax, financial institution laws or regulations or other laws or
regulations, economic changes not in the ordinary course of business cycles, or
compliance with judicial decrees or other legal requirements.
Stock Appreciation Rights. The Omnibus Plan provides that the Committee
may award to eligible directors and employees Rights to receive cash based upon
increases in the market price of Common Stock over the last transaction price of
the Common Stock on the Nasdaq National Market (the "Base Price") on the date of
the award. The Committee may adjust the Base Price of a SAR based upon the
market value performance of the Common Stock in comparison with the aggregate
market value performance of a selected index or at a stated annual percentage
rate. The expiration date of a SAR may be no more than ten years from the date
of award.
Each SAR awarded by the Committee may be exercisable immediately or may
become vested over such period or periods as the Committee may establish, which
periods may be accelerated or shortened in the Committee's discretion.
Each SAR awarded will terminate upon the expiration date established by the
Committee, termination of the employment or directorship of the SAR recipient,
or in the event of a change in control, as described above in connection with
the termination of Options.
12
Book Value Shares. The Omnibus Plan provides that the Committee may award
to eligible directors and eligible employees long term incentive units, each
equivalent in value to the book value of one share of Common Stock on the date
of award ("Book Value Shares"). The Committee shall specify the period or
periods of time within which each Book Value Share will vest, which period or
periods may be accelerated or shortened by the Committee. Upon redemption, the
holder of a Book Value Share will receive an amount equal to the difference
between the book value of the Common Stock at the time the Book Value Share is
awarded and the book value of the Common Stock at the time the Book Value Share
is redeemed, adjusted for the effects of dividends, new share issuances, and
mark-to-market valuations of the Company's investment securities portfolio in
accordance with FASB 115.
The expiration date of each Book Value Share awarded shall be established
by the Committee, up to a maximum of ten years from the date of award. However,
awards of Book Value Shares shall earlier terminate in the same manner as
described above in connection with the termination of Options.
Adjustments. In the event the outstanding shares of the Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of securities as a result of a stock split, reverse stock split, stock dividend,
recapitalization, merger, share exchange acquisition, or reclassification,
appropriate proportionate adjustments will be made in (i) the aggregate number
or kind of shares which may be issued pursuant to exercise of, or which
underlie, Rights; (ii) the exercise or other purchase price, or Base Price, and
the number and/or kind of shares acquirable under, or underlying, Rights; (iii)
and rights and matters determined on a per share basis under the Omnibus Plan.
Any such adjustment will be made by the Committee, subject to ratification by
the Board of Directors. As described above, the Base Price of a SAR may also be
adjusted by the Committee to reflect changes in a selected index. Except with
regard to Units and Book Value Shares awarded under the Omnibus Plan, no
adjustment in the Rights will be required by reason of the issuance of Common
Stock, or securities convertible into Common Stock, by the Company for cash or
the issuance of shares of Common Stock by the Company in exchange for shares of
the capital stock of any corporation, financial institution or other
organization acquired by the Company or a subsidiary thereof in connection
therewith.
Any shares of Common Stock allocated to Rights granted under the Omnibus
Plan, which Rights are subsequently cancelled or forfeited, will be available
for further allocation upon such cancellation or forfeiture.
Federal Income Tax Consequences.
Options. Under current provisions of the Code, the federal income tax
treatment of ISOs and NSOs is different. Options granted to employees under
the Omnibus Plan may be ISOs which are designed to result in beneficial tax
treatment to the employee but not a tax deduction to the Company.
The holder of an ISO generally is not taxed for federal income tax
purposes on either the grant or the exercise of the option. However, the
optionee must include in his or her federal alternative minimum tax income
any excess (the "Bargain Element") of the acquired common stock's fair
market value at the time of exercise over the exercise price paid by the
optionee. Furthermore, if the optionee sells, exchanges, gives or otherwise
disposes of such common stock (other than in certain types of transactions)
either within two years after the option was granted or within one year
after the option was exercised (an "Early Disposition"), the optionee
generally must recognize the Bargain Element as compensation income for
regular federal income tax purposes. Any gain realized on the disposition
in excess of the Bargain Element is subject to recognition under the usual
rules applying to dispositions of property. If a taxable sale or exchange
is made after such holding periods are satisfied, the difference between
the exercise price and the amount realized upon the disposition of the
common stock generally will constitute a capital gain or loss for tax
purposes.
Options granted to directors under the Omnibus Plan would be "NSOs."
In general, the holder of an NSO will recognize at the time of exercise of
the NSO, compensation income equal to the amount by which the fair market
value of the common stock received on the date of exercise exceeds the sum
of the exercise price and any amount paid for the NSO.
13
If an optionee exercises an ISO or NSO and delivers shares of common
stock as payment for part or all of the exercise price of the stock
purchased (the "Payment Stock"), no gain or loss generally will be
recognized with respect to the Payment Stock; provided, however, if the
Payment Stock was acquired pursuant to the exercise of an ISO, the optionee
will be subject to recognizing as compensation income the Bargain Element
on the Payment Stock as an Early Disposition if the exchange for the new
shares occurs prior to the expiration of the holding periods for the
Payment Stock.
The Company generally would not recognize gain or loss or be entitled
to a deduction upon either the grant of an ISO or NSO or the optionee's
exercise of an ISO. The Company generally will recognize gain or loss or be
entitled to a deduction upon the exercise of an NSO. If there is an Early
Disposition, the Company generally would be entitled to deduct the Bargain
Element as compensation paid to the optionee.
Restricted Stock. Pursuant to Section 83 of the Code, recipients of
Restricted Stock awards under the Omnibus Plan will recognize ordinary
income in an amount equal to the fair market value of the shares of Common
Stock granted to them at the time that the shares vest and become
transferable. The Company will be entitled to deduct as a compensation
expense for tax purposes the same amounts recognized as income by
recipients of Restricted Stock awards in the year in which such amounts are
included in income.
Units. The Company expects that participants generally will not be
taxed on the award of Units. Instead, any cash and the then fair market
value of any Common Stock received by the participants upon the
distribution of a Unit generally will be taxable to the participants as
compensation income upon such distribution. At that time, the Company
generally will be entitled to claim a deduction in an amount equal to the
compensation income.
SARs. Pursuant to Section 83 of the code, recipients of SARs under the
Omnibus Plan will recognize, at the time a SAR award is exercised, ordinary
income in an amount equal to the difference between the fair market value
of the Common Stock at the time of award of the SAR and the fair market
value of the Common Stock at the time that the SAR is exercised. The
Company will be entitled to deduct as a compensation expense for tax
purposes the same amounts recognized as income by recipients of SAR awards
in the year in which such amounts are included in income.
Book Value Shares. The Company expects that participants generally
will not be taxed on the award of Book Value Shares. Instead, any cash
received by the participants upon redemption of the Book Value Shares
generally will be taxable to the participant as compensation income upon
distribution. At that time, the Company generally will be entitled to claim
a deduction in an amount equal to the compensation income.
The above description of tax consequences under federal law is
necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual
circumstances. Finally, the consequences under applicable state and local
income tax laws may not be the same as under the federal income tax laws.
Grants and Awards Made During the Fiscal Year Ended December 31, 2000. On
September 25, 2000, the Board of Directors awarded options to purchase 49,941
shares of Common Stock to 43 officers and employees of the Bank at an exercise
price of $12.69 per share. Also on April 24, 2000, the options granted in 1999
were repriced to reflect the payment on April 24, 2000 of a 10% stock dividend.
14
Following is certain information related to the options granted to Tony W.
Wolfe, Joseph F. Beaman, Jr., Lance A. Sellers, Clifton A. Wike, and William D.
Cable.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES FOR STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
----------------- -------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES OR BASE EXPIRATION
NAME GRANTED IN FISCAL YEAR PRICE DATE 5% 10%
- --------------------- ------------ --------------- ----------- ---------- -------------- ---------------
Tony W. Wolfe 10,022(1) 20.07% $ 12.69(2) 9/25/10 $ 79,966.55 $ 202,650.93
7,157(3) 25.88% $ 16.36(4) 9/28/09 $ 73,648.59 $ 186,639.99
Joseph F. Beaman, Jr. 5,765(1) 11.54% $ 12.69(2) 9/25/10 $ 45,999.51 $ 116,571.80
4,294(3) 15.53% $ 16.36(4) 9/28/09 $ 44,193.68 $ 111,995.47
Lance A. Sellers 4,444(1) 8.90% $ 12.69(2) 9/25/10 $ 35,459.12 $ 89,860.38
2,688(3) 9.72% $ 16.36(4) 9/28/09 $ 27,666.33 $ 70,111.92
Clifton A. Wike 2,655(1) 5.32% $ 12.69(2) 9/25/10 $ 21,184.51 $ 53,685.71
2,000(3) 7.23% $ 16.36(4) 9/28/09 $ 20,579.95 $ 52,153.63
William D. Cable 2,455(1) 4.92% $ 12.69(2) 9/25/10 $ 19,588.69 $ 49,641.59
978(3) 3.54% $ 16.36(4) 9/28/09 $ 10,063.57 $ 25,503.07
<FN>
_____________________
1 One-third of the options granted are exercisable on or after September 25,
2001, another one-third on or after September 25,2002, and the final
one-third on or after September 25, 2003.
2 Represents the closing market price per share of the underlying securities
on the date of grant (September 25, 2000).
3 Adjusted to reflect the payment on April 24, 2000 of a 10% stock dividend.
20% of the options granted became exercisable on September 28, 2000 and 20%
will vest each year thereafter with the last 20% vesting on September 28,
2004.
4 Represents the closing market price per share of the underlying securities
on September 28, 1999, the date of grant (adjusted to reflect the April 24,
2000 10% stock dividend).
No options were exercised by Mr. Wolfe, Mr. Beaman, Mr. Sellers, Mr. Wike,
or Mr. Cable during the fiscal year ended December 31, 2000. However, on
September 25, 2000, the vesting schedule on the options granted in 1999 was
amended to permit 20% of the options to vest on September 28, 2000, and 20% to
vest each year thereafter with the last 20% vesting on September 28, 2004.
15
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED REALIZED OPTIONS/SARS AT OPTIONS/SARS AT
NAME ON EXERCISE (#) ($) FISCAL YEAR END(1) FISCAL YEAR END(2)
- --------------------- ---------------- ---------- -------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
TONY W. WOLFE 0 $ 0 1,431/0 15,748/0 $0/$0 $ 8,142.88/$0
JOSEPH F. BEAMAN, JR. 0 $ 0 859/0 9,200/0 $0/$0 $ 4,684.06/$0
LANCE A. SELLERS 0 $ 0 538/0 6,594/0 $0/$0 $ 3,610.75/$0
CLIFTON A. WIKE 0 $ 0 400/0 4,255/0 $0/$0 $ 2,157.19/$0
WILLIAM D. CABLE 0 $ 0 196/0 3,237/0 $0/$0 $ 1,994.69/$0
<FN>
______________________
1 Options to purchase 17,117 shares of Common Stock (adjusted to reflect the
April 24, 2000 10% stock dividend) were granted to the named persons as of
September 28,1999, and pursuant to an amendment to the Stock Option Grant
Agreements dated September 28, 2000 will vest 20% each year over a
five-year period beginning on September 28, 2000, with the last 20% vesting
on September 28, 2004. Options to purchase 25,341 shares of Common Stock
were granted to the named persons as of September 25, 2000 and will vest
one-third on September 25, 2001, one-third on September 25, 2002 and
one-third on September 25, 2003.
2 The exercise price of the stock options granted on September 28, 1999 is
$16.36 (adjusted to reflect the April 24, 2000 10% stock dividend). The
exercise price of the stock options granted on September 25, 2000 is
$12.69. On December 31, 2000, the closing market price for the Common Stock
as reported on the Nasdaq National Market was $13.50.
INCENTIVE COMPENSATION PLANS
The Bank also has a Management Incentive Plan for officers and an Employee
Incentive Plan for employees of the Bank. Eligibility under the Employee
Incentive Plan is granted to all employees upon one year of service with the
Bank. Participants in the Employee Incentive Plan are entitled to receive
quarterly cash incentives based upon a graduated schedule indexed to attainment
of corporate budget. Participants in the Management Incentive Plan are
recommended annually by the President and Chief Executive Officer to the Bank's
Board of Directors. Each individual's incentive pool is determined by a formula
which links attainment of corporate budget with attainment of individual goals
and objectives. Incentives under the Management Incentive Plan are paid
annually.
PROFIT SHARING AND 401(K) PLANS
The Bank has a Profit Sharing Plan that covers substantially all employees
who have at least one year's continuous service. As the result of overfunding in
prior years, the Bank made no contribution to the profit sharing plan for the
year ended December 31, 2000. No investments in Bank stock have been made by
the plan.
In addition to the Profit Sharing Plan, the Bank has a 401(k) Plan for all
eligible employees. Under this plan the Bank matches employee contributions to
a maximum of five percent of annual compensation. The Bank's 2000 contribution
to the 401(k) Plan pursuant to this formula was approximately $249,000. All
contributions to the 401(k) Plan are tax deferred. No investments in Bank stock
have been made through the plan.
The Profit Sharing Plan and 401(k) Plan permit participants to choose from
ten investment funds which are selected by a committee comprised of selected
directors and senior management. Both the 401(k) Plan and Profit Sharing Plan
were amended in 2000 to permit participation in the plans beginning in the
second month of employment. Both plans provide for vesting of 20% of the
benefit after three years employment and 20% each year thereafter until
participants are 100% vested after seven years employment.
16
DISCRETIONARY BONUSES AND SERVICE AWARDS
In the past, the Bank has paid bonuses to its employees in amounts
determined in the discretion of the Bank's board of directors. The Bank
anticipates that discretionary bonuses will continue to be paid to its employees
in the future.
INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT
Certain directors and executive officers of the Bank and their immediate
families and associates were customers of and had transactions with the Bank in
the ordinary course of business during 2000. All outstanding loans, extensions
of credit or overdrafts, endorsements and guarantees outstanding at any time
during 2000 (i) were made in the ordinary course of business, (ii) were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and (iii)
were transactions which in the opinion of management of the Bank did not involve
more than the normal risk of collectibility or present other unfavorable
features.
The Company and the Bank have secured insurance coverage, including, but
not limited to, financial institution bond, directors and officers liability,
property and casualty, business auto, mortgage holders' errors and omissions,
fiduciary responsibility, workers compensation, and umbrella liability, for 2001
at an approximate cost of $108,000 from First Security Company, Inc., of which
Director John H. Elmore, Jr. is a Director and holds less than a one percent
ownership interest. In the opinion of management of the Company, the terms of
the insurance coverage were no less favorable than could have been obtained from
unrelated parties.
REPORT OF COMPENSATION COMMITTEE
The Company does not have a Compensation Committee. However, the Bank's
board of directors has a Compensation Committee which is now composed of
Directors R. Abernethy, Eckard, Elmore, Robinson, Sherrill, and Timmerman. The
Committee meets on an as needed basis to review the Bank's salary program and to
make recommendations to the Bank's board of directors regarding compensation of
the executive officers. The Bank's board of directors ultimately determines
such compensation. The salary of each of the executive officers is determined
based upon the executive officer's contributions to the Bank's overall
profitability, maintenance of regulatory compliance standards, professional
leadership, and management effectiveness in meeting the needs of day-to-day
operations. The Committee also compares the compensation of the executive
officers with compensation paid to executives of other businesses in the Bank's
market area, as well as to appropriate state and national salary data. These
factors were considered in establishing the compensation of Tony W. Wolfe,
President and Chief Executive Officer, Joseph F. Beaman, Jr., Executive Vice
President, Chief Financial Officer and Corporate Secretary, Lance A. Sellers,
Executive Vice President-Credit Administration, Mortgage Lending, and Commercial
Banking, Clifton A. Wike, Senior Vice President-Lending, and William D. Cable,
Senior Vice President-Information Services, during the 2000 fiscal year. In
addition, all of the executive officers of the Bank are eligible to receive
discretionary bonuses declared by the Bank's board of directors. The amount of
such bonuses and incentive payments is based upon the net income of the Bank in
comparison to attainment of corporate budget and attainment of corporate goals
and objectives.
Robert C. Abernethy
Bruce R. Eckard
John H. Elmore, Jr.
Larry E. Robinson
Fred L. Sherrill, Jr.
Dan Ray Timmerman, Sr.
17
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
No member of the Compensation Committee is now, or formerly was, an officer
or employee of the Company or the Bank. Tony W. Wolfe, President and Chief
Executive Officer of the Bank, makes recommendations to the Committee regarding
compensation of the executive officers. Mr. Wolfe participates in the
deliberations, but not the decisions, of the Committee regarding compensation of
executive officers other than himself. He does not participate in the
Committee's discussions or decisions regarding his own compensation.
REPORT OF AUDIT AND EXAMINING COMMITTEE
The Company has adopted a written charter for the Audit and Examining
Committee, included in this Proxy Statement as Appendix B, which is reviewed
annually, and amended as needed, by the Committee. The Audit and Examining
Committee has reviewed and discussed the audited financial statements with
management of the Company and has discussed with the independent auditors the
matters required to be discussed by SAS 61. In addition, the Committee has
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1, and has discussed with
the independent accountant the independent accountant's independence. Based
upon these reviews and discussions, the Committee recommended to the Board of
Directors that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
Robert C. Abernethy
B. E. Matthews
Charles F. Murray
Larry E. Robinson
Fred L. Sherrill, Jr.
Benjamin I. Zachary
18
PERFORMANCE GRAPH
The following graph compares the Company's cumulative shareholder return on
its Common Stock with a Nasdaq index and with a southeastern bank index. The
graph was prepared by SNL Securities, L.C., Charlottesville, Virginia, using
data as of December 31, 2000.
COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS
Performance Report for
Peoples Bancorp of North Carolina, Inc.
[Graphic Omitted]
PERIOD ENDING
-------------------------------------------------------------------------------------
INDEX 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
- ---------------------------------------------------------------------------------------------------------------
Peoples Bancorp Inc. 100.00 126.93 204.25 182.44 181.00 141.78
NASDAQ - Total US* 100.00 123.04 150.69 212.51 394.92 237.62
SNL Southeast Bank Index 100.00 137.27 208.09 221.53 174.32 175.04
<FN>
* Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 2001. Used with permission. All rights
reserved. crsp.com.
SNL SECURITIES LC (804) 977-1600
(C) 2001
19
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR
Porter Keadle Moore, LLP Atlanta, Georgia ("PKM"), has been selected as the
Company's and the Bank's independent auditor for the year ending December 31,
2001. Such selection is being submitted to the Company's shareholders for
ratification. Representatives of PKM are expected to attend the Meeting and
will be afforded an opportunity to make a statement, if they so desire, and to
respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
---
RATIFICATION OF THE SELECTION OF PKM AS INDEPENDENT AUDITOR FOR THE COMPANY AND
THE BANK FOR THE FISCAL YEAR ENDING DECEMBER 31, 2001.
AUDIT FEES
The aggregate fees (including related out-of-pocket expenses) billed for
professional services rendered by PKM in connection with (i) the audit of
the Company's and the Bank's annual financial statements for the December 31,
2000 fiscal year, (ii) its reviews of the financial statements included in the
Company's Forms 10-Q for that fiscal year and (iii) related fees and costs were
$92,015.23.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
PKM did not, directly or indirectly, operate or supervise the operation of
the Company's information system or manage the Company's local area network for
the fiscal year ended December 31, 2000.
ALL OTHER FEES
In addition to the fees outlined above, PKM billed fees in the amount of
$51,454.61 for additional services rendered during the fiscal year ended
December 31, 2000. The Audit and Examining Committee of the Board of Directors
has determined that the provision of these services is compatible with
maintaining PKM's independence.
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
It is presently anticipated that the 2002 Annual Meeting of Shareholders of
the Company will be held on May 2, 2002. In order for shareholder proposals to
be included in the Company's proxy materials for that meeting, such proposals
must be received by the Secretary of the Company at the Company's principal
executive office no later than December 31, 2001, and meet all other applicable
requirements for inclusion in the proxy statement.
In the alternative, a shareholder may commence his or her own proxy
solicitation and present a proposal from the floor at the 2002 Annual Meeting of
Shareholders of the Company. In order to do so, the shareholder must notify the
Secretary of the Company in writing, at the Company's principal executive office
no later than February 17, 2002, of his or her proposal. If the Secretary of
the Company is not notified of the shareholder's proposal by February 17, 2002,
the Board of Directors may vote on the proposal pursuant to the discretionary
authority granted by the proxies solicited by the Board of Directors for the
2002 Annual Meeting.
20
OTHER MATTERS
Management knows of no other matters to be presented for consideration at
the Meeting or any adjournments thereof. If any other matters shall properly
come before the Meeting, it is intended that the proxyholders named in the
enclosed form of proxy will vote the shares represented thereby in accordance
with their judgment, pursuant to the discretionary authority granted therein.
MISCELLANEOUS
The Annual Report of the Company for the year ended December 31, 2000,
which includes financial statements audited and reported upon by the Company's
independent auditor, is being mailed as Appendix A to this Proxy Statement;
however, it is not intended that the Annual Report be deemed a part of this
Proxy Statement or a solicitation of proxies.
THE FORM 10-K FILED BY THE COMPANY WITH THE SEC, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO, WILL BE PROVIDED FREE OF CHARGE UPON WRITTEN
REQUEST DIRECTED TO: PEOPLES BANCORP OF NORTH CAROLINA, INC., POST OFFICE BOX
467, 518 WEST C STREET, NEWTON, NORTH CAROLINA 28658-0467, ATTENTION: JOSEPH F.
BEAMAN, JR.
By Order of the Board of Directors,
/s/ Tony W. Wolfe
Tony W. Wolfe
President and Chief Executive Officer
Newton, North Carolina
April 3, 2001
21
APPENDIX A
[THIS PAGE INTENTIONALLY LEFT BLANK]
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
- ---------------------------------------------------- ----------- ---------- ---------- ---------- ----------
<FN>
*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
[Graphic Omitted]
Porter Keadle Moore, LLP
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
Certified Public Accountants
- --------------------------------------------------------------------------------
Suite 1800 - 235 Peachtree Street NE - Atlanta, Georgia 30303 -
Phone 404-588-4200 - Fax 404-588-4222
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
APPENDIX B
[THIS PAGE INTENTIONALLY LEFT BLANK]
PEOPLES BANK
MEMBER FDIC
AUDITING AND EXAMINING COMMITTEE CHARTER
June 2000
The Auditing and Examining Committee ("the Committee") of the Board of Directors
of Peoples Bancorp of North Carolina, Inc. will have the oversight
responsibility, authority and specific duties as described below.
COMPOSITION
The Auditing and Examining Committee will be comprised of three or more
directors as determined by the Board. The members of the Committee will meet
the independence and experience requirements of the NASDAQ'S MARKETPLACE RULES.
The Chief Executive Officer of the Company and the Chairman of the Board of
Directors will select the members of the Auditing and Examining Committee. The
CEO and Chairman will recommend one of the members of the Auditing and Examining
Committee to be Committee Chair.
RESPONSIBILITY
The Committee is a part of the Board. Its primary function is to assist the
Board in fulfilling its oversight responsibilities with respect to:
- The quarterly and annual financial information to be provided to
shareholders and the Securities and Exchange Commission (SEC);
- The system of internal controls that management has established;
- The internal and external audit process.
In addition, the Committee provides an avenue for communication between internal
audit, the independent accountants, financial management and the Board. The
Committee should have a clear understanding with the independent accountants
that they must maintain an open and transparent relationship with the Committee,
and that the ultimate accountability of the independent accountants is to the
Board and the Committee. The Committee will make regular reports to the Board
concerning its activities.
While the Auditing and Examining Committee has the responsibilities and powers
set forth in this Charter, it is not the duty of the Committee to plan or
conduct audits or to determine that the Company's financial statements are
complete and accurate and are in accordance with generally accepted accounting
principles. This is the responsibility of management and the independent
auditor. Nor is it the duty of the Auditing and Examining Committee to conduct
investigations, or to resolve disagreements, if any, between management and the
independent auditor.
AUTHORITY
Subject to the prior approval of the Board, the Committee is granted authority
to investigate any matter or activity involving financial accounting and
financial reporting, as well as the internal controls of the Company. In that
regard, the Committee will have the authority to approve the retention of
external professionals to render advice and counsel in such matters. All
employees will be directed to cooperate with respect thereto as requested by
members of the Committee.
B-1
MEETINGS
The Committee is to meet at least six times annually and as many additional
times as the Committee deems necessary. The Committee is to meet in separate
executive sessions with the chief financial officer, independent accountants and
internal audit at least once each year and at other times when considered
appropriate.
ATTENDANCE
Committee members will strive to be present at all meetings. As necessary or
desirable, the Committee Chair may request that members of management and
representatives of the independent accountants and internal audit be present at
Committee meetings.
SPECIFIC DUTIES
In carrying out its oversight responsibilities, the Committee will:
1. Review and reassess the adequacy of this charter annually and recommend any
proposed changes to the Board for approval. This should be done in
compliance with applicable NASDAQ'S MARKETPLACE RULES.
2. Review with the Company's management, internal audit and independent
accountants the Company's accounting and financial reporting controls.
Obtain annually in writing from the independent accountants their letter as
to the adequacy of such controls.
3. Review with the Company's management, internal audit and independent
accountants significant accounting and reporting principles, practices and
procedures applied by the Company in preparing its financial statements.
Discuss with the independent accountants their judgments about the quality,
not just the acceptability, of the Company's accounting principles used in
financial reporting.
4. Review the scope of the internal audit's work plan for the year and receive
a summary report of major findings by internal auditors and how management
is addressing the conditions reported.
5. Review the scope and general extent of the independent accountants' annual
audit. The Committee's review should include an explanation from the
independent accountants of the factors considered by the accountants in
determining the audit scope, including the major risk factors. The
independent accountants should confirm to the Committee that no limitations
have been placed on the scope or nature of their audit procedures. The
Committee will review annually with management the fee arrangement with the
independent accountants.
6. Inquire as to the independence of the independent accountants and obtain
from the independent accountants, at least annually, a formal written
statement delineating all relationships between the independent accountants
and the Company as contemplated by Independence Standards Board Standard
No.1, Independence Discussions with Audit Committees.
7. Have a predetermined arrangement with the independent accountants that they
will advise the Committee through its Chair and management of the Company
of any matters identified through procedures followed for interim quarterly
financial statements, and that such notification as required under
standards for communication with Audit Committees is to be made prior to
the related press release or, if not practicable, prior to filing Forms
10-Q. Also receive a written confirmation provided by the independent
accountants at the end of each of the first three quarters of the year that
they have nothing to report to the Committee, if that is the case, or the
written enumeration of required reporting issues.
8. At the completion of the annual audit, review with management, internal
audit and the independent accountants the following:
B-2
- The annual financial statements and related footnotes and financial
information to be included in the Company's annual report to
shareholders and on Form 10-K.
- Results of the audit of the financial statements and the related
report thereon and if applicable, a report on changes during the year
in accounting principles and their application.
- Significant changes to the audit plan, if any, and any serious
disputes or difficulties with management encountered during the audit.
Inquire about the cooperation received by the independent accountants
during their audit, including access to all requested records, data
and information. Inquire of the independent accountants whether there
have been any disagreements with management, which, if not
satisfactorily resolved, would have caused them to issue a nonstandard
report on the Company's financial statements.
- Other communications as required to be communicated by the independent
accountants by Statement of Auditing Standards (SAS) 61 as amended by
SAS 90 relating to the conduct of the audit. Further, receive a
written communication provided by the independent accountants
concerning their judgment about the quality of the Company's
accounting principles, as outlined in SAS 61 as amended by SAS 90, and
that they concur with management's representation concerning audit
adjustments.
If deemed appropriate after such review and discussion, recommend to the
Board that the financial statements be included in the Company's annual
report on Form 10-K.
9. After preparation by management and review by internal audit and
independent accountants, approve the report required under SEC rules to be
included in the Company's annual proxy statement. The charter is to be
published as an appendix to the proxy statement every three years.
10. Discuss with the independent accountants the quality of the Company's
financial and accounting personnel. Also, elicit the comments of management
regarding the responsiveness of the independent accountants to the
Company's needs.
11. Meet with management, internal audit and the independent accountants to
discuss any relevant significant recommendations that the independent
accountants may have, particularly those characterized as 'material' or
'serious'. Typically, such recommendations will be presented by the
independent accountants in the form of a Letter of Comments and
Recommendations to the Committee. The Committee should review responses of
management to the Letter of Comments and Recommendations from the
independent accountants and receive follow-up reports on action taken
concerning the aforementioned recommendations.
12. Recommend to the Board the selection, retention or termination of the
Company's independent accountants.
13. Review the appointment and replacement of the senior internal audit
executive.
14. Review with management, internal audit and the independent accountants the
methods used to establish and monitor the Company's policies with respect
to unethical or illegal activities by Company employees that may have a
material impact on the financial statements.
15. Advise the Board with respect to the Company's policies and procedures
regarding compliance with applicable laws and regulations and with the
Company's Code of Conduct.
16. As the Committee may deem appropriate, obtain, weigh and consider expert
advice as to the Audit Committee related rules of the NASDAQ'S MARKETPLACE
RULES, Statements of Auditing Standards and other accounting, legal and
regulatory provisions.
B-3
PEOPLES:
PEOPLES BANCORP OF NORTH CAROLINA, INC. | 2000 ANNUAL REPORT
PEOPLES:
growing closer to the community.
[Picture Omitted]
East side of courtsquare in Newton, pre-World War II. Photo courtesy of the Alma
Yount Yancey Collection - Catawba County Museum of History Archives.
Table of Contents:
1 Introduction
2 President's Message
3 Physical Expansion
4 2000 Performance
5 New Beginnings
7 Growing Success
9 Corporate Success & Services
12 Financial Highlights
13 Selected Financial Data
14 Report of Independent Certified Public Accountants
15 Financials
18 Peoples Bank Board of Directors and Officers
19 Peoples Bancorp of North Carolina, Inc. Board of Directors and Officers
20 Shareholders & General Information & Location Directory
21 Epilogue
[Graphic Omitted]
[Picture Omitted]
INTRODUCTION:
Growth and change are essential characteristics of life. We see reminders of
this fact all around us in our everyday lives - in the child whose pants are
suddenly two inches too short, in the crops and gardens that burst forth in a
blaze of color every spring, in the home addition that welcomes the arrival of a
new member of the family, in the business that opens another store to better
serve its customers. And in the year 2000, Peoples Bank, a wholly-owned
subsidiary of Peoples Bancorp of North Carolina, Inc., had the distinction of
sharing the pleasure of growth both great and small with the people of our
community.
GROWING CLOSER
TO THE COMMUNITY:
The year 2000 was a period of exceptional growth on many levels for Peoples
Bank. This growth was most evident in the completion of our new corporate
center, our expansion into the Lincolnton and Triangle markets and the sale of
our former corporate headquarters, which will be the site of the new Newton Post
Office. During this same period, we also experienced record earnings fueled by
significant increases in the growth of our loans and deposits.
[Picture Omitted]
Tony W. Wolfe, President and Chief Executive Officer of Peoples Bancorp of North
Carolina, Inc. and Peoples Bank; with Robert C. Abernethy, Chairman of the Board
of Peoples Bancorp of North Carolina, Inc. and Peoples Bank
For most financial institutions, such robust growth alone would be cause for
celebration. But as a locally based community bank, we at Peoples Bank are even
more proud of what this growth symbolizes to the community.
Rather than pursuing growth for growth's sake, we at Peoples Bank see our
physical expansion as yet another way we are growing closer to the community.
Consolidating the staff of five separate locations within one strategically
located corporate center enables us to enhance communications and provide more
efficient customer service at all levels of the Bank, both internally and
externally. Coordinating the sale of our former headquarters to provide for a
more accessible state-of-the-art, Newton Post Office exemplifies our continuing
involvement in the community's well-being. And our expansion into the Lincolnton
and Triangle markets to fill the void created by the loss of another local
community bank further substantiates Peoples Bank's 88-year commitment to caring
for the people of our community.
All of us at Peoples Bank are equally gratified by the record earnings
performance you will review through this report. We see this success as a
validation of our philosophy of what a true community bank should be as well as
our long-term vision of strategic planning for growth and performance. In recent
years, we have made a concerted effort to make Peoples Bank everything our
customers have told us they want us to be. By taking the time to listen closely
and respond to their collective voice, Peoples Bank has been rewarded with a
significant earnings trend that reinforces the inherent wisdom of our customers'
perceptions.
Finally, in assessing the success that was the year 2000, I would be remiss if I
did not attribute that triumph to all the men and women who are the lifeblood of
Peoples Bank. Every decision by every person in every division is responsible
for the ultimate success of this Company. To achieve this level of success while
going through an expansion of this magnitude and still providing exceptional
customer service is nothing short of phenomenal. And in the year 2000, the
people who worked with us and the customers who chose us proved beyond a doubt
that they truly believe in the ideals Peoples Bank represents. After reviewing
this report, and our plans for the year ahead, we hope you will as well.
/s/ Tony W. Wolfe
Tony W. Wolfe
President and Chief Executive Officer
2
GROWING FURTHER: The physical expansion of Peoples Bank in 2000.
[Picture Omitted]
[Graphic Omitted]
GROWTH:
The face of Peoples Bank underwent considerable change throughout the year 2000,
particularly in our Newton base of operations. The year past was also a time
when we introduced ourselves to new faces in two neighboring communities in the
Lincoln County area when they needed us most.
But even in the midst of such sweeping changes, the staff of Peoples Bank and
the people we serve remained united by one unshakeable constant - our steadfast
commitment to improving upon the quality of life in the communities we
represent.
3
RECORD EARNINGS SET THE PACE
FOR PERFORMANCE IN 2000.
2000
PERFORMANCE
Compared to the year ended December 31, 1999, net income increased 18 percent.
Total assets increased 20 percent. Loans increased 21 percent. And deposits
increased 19 percent. Collectively, this performance surpassed all previous
performance records in the 88-year history of the Company.
[Graphic Omitted]
4
NEW BEGINNINGS
IN NEWTON:
Over the past four years, assets at Peoples Bancorp have increased at an average
annual rate of 20 percent. We at Peoples Bank had simply outgrown our facilities
and required additional space for operational support. But true to our spirit of
being a true community bank, we could not in good conscience address this
challenge unless we were assured that it would benefit the people of the Newton
community as well as Peoples Bancorp.
With this goal in mind, we secured and renovated the former site of a
supermarket located at the intersection of Highway 321 and Highway 10 at the
Newton Crossroads Shopping Center in Newton. This location provided exceptional
visibility and greater accessibility while keeping Peoples Bancorp part of the
Newton business district that is our home.
[Picture Omitted]
peoples bancorp center:
518 West C Street
Newton, North Carolina
Transition into Peoples Bancorp's new corporate center began in November, 2000,
consolidating support services that had previously operated from five separate
facilities: mortgage/appraisal, information technologies, check imaging, loan
and deposit operations, credit administration, mail center, bank card division,
finance department, risk management, training department, human resources and
administration.
In addition, customers gained improved accessibility to services offered by the
Bank's two subsidiary companies, Peoples Investment Services, Inc., and Peoples
Real Estate and Appraisal Services, Inc., as well as the Bank's commercial loan
department.
We feel this close physical proximity can only enhance our internal
communications and operational efficiencies, providing real, measurable benefits
and lasting value for our customers, shareholders, and staff.
As we completed the conversion of our new corporate headquarters, we also sought
to fill the void our relocation would leave in downtown Newton. We coordinated
the sale of our former home office to the US Postal Service, which will open a
more accessible, expanded Newton Post Office on the site. The Peoples Bank
retail branch originally on that site will soon relocate to a new, custom-built
facility just off Highway 321 in Newton, on West A Street. Until the new Newton
branch opens in April, 2001, Peoples Bank will lease existing banking facilities
from the Post Office to prevent any interruption in banking service.
Such transitions are not always easy. But we at Peoples Bank remain committed to
the people of Newton for all the support they have shown us throughout the
years. By continuing to reinvest in our community, Peoples Bank is enhancing the
potential for greater growth throughout the region.
[Picture Omitted]
board of directors:
Standing left to right: Dan Ray Timmerman, Sr., John H. Elmore, Jr., Charles F.
Murray, Bruce R. Eckard, Benjamin I. Zachary, James S. Abernethy, Larry E.
Robinson, Fred L. Sherrill, Jr., B. E. Matthews
Seated left to right: Robert C. Abernethy, Chairman; Tony W. Wolfe, President
and Chief Executive Officer
5
FORGING A NEW
LINK WITH
LINCOLN COUNTY:
THE OPENING OF PEOPLES
BANK'S LINCOLNTON AND
TRIANGLE OFFICES.
Following the acquisition of Lincoln County's leading community bank by a larger
financial institution, many of its former long-time customers felt abandoned. At
the time, Peoples Bank operated a loan production office in downtown Lincolnton
on East Main Street and a modular unit in the Triangle community, located at the
intersection of Highways 73 and 16. As a community Bank, we recognized the
area's tremendous potential and developed a plan to fill the void and capitalize
upon new opportunities for growth.
Peoples Bank bolstered its commitment to Lincoln County residents by building
two new full-service branch offices: one in downtown Lincolnton, and one in the
Triangle community to replace the modular unit.
To help establish and expand our financial relationships with the residents of
Lincoln County, Peoples Bank employed a number of seasoned, well-respected
Lincoln County banking professionals to conduct the day-to-day operations of
these two new Peoples Bank offices. Their in-depth familiarity and existing
relationships with the people of the area have proved to be invaluable in
helping Peoples Bank provide the exceptional personal service that our customers
deserve.
GROWING DEEPER
RELATIONSHIPS:
While the year 2000 was exemplified by tremendous physical growth in our newest
markets, Peoples Bank continued to make substantial progress in our Catawba
County and Alexander County markets as well. Our achievements in these areas
were reinforced by the findings of a 2000 marketing study which reaffirmed our
customers' positive perceptions of Peoples Bank, our employees, services and
relationships with the people of the local communities we serve.
Capitalizing upon the vast potential of the Hickory market continued to be a
primary focus in 2000, and we plan to make achieving greater market penetration
and awareness of Peoples Bank an ongoing focus in this area throughout the
coming year.
PEOPLES
INVESTMENT
SERVICES, INC.:
Throughout 2000 we focused on the continued development of our two subsidiaries,
Peoples Investment Services, Inc. and Peoples Real Estate and Appraisal
Services, Inc. Customers who access the products and services of our
subsidiaries are presented with a multitude of options to assist them in the
attainment of their financial goals.
PEOPLES
REAL ESTATE
& APPRAISAL
SERVICES, INC.:
Peoples Investment Services, Inc. offers an extensive range of securities and
financial management services, including stocks, mutual funds and bonds.
Securities are offered through Raymond James Financial Services, Inc., member
NASD/SIPC. A wider scope of services designed to support residential and
commercial mortgage-related activities are available through Peoples Real Estate
and Appraisal Services, Inc.
growing stronger:
[Picture Omitted]
strengthening our roots throughout our market area.
The subsidiary serves to enhance our ability to respond to customers' requests
Arising through our mortgage loan department.
6
GROWING SUCCESS:
EXPLORING THE STORIES
BEHIND 2000.
Rather than merely report the year 2000's impressive figures, the management of
Peoples Bank would like to share some of the vision, planning, strategies,
dedication and hard work behind the scenes that made this historic achievement
possible.
[Picture Omitted]
Bo Starnes and Grady Ingle, the owners of Windy City Grill in Hickory, and Rick
Moser, Vice President-Branch Manager of Peoples Bank's Viewmont office.
PROFILE: WINDY CITY GRILL
Combining the right ingredients is essential to creating a great restaurant. The
same principle also applies to great working relationships - like the one
between Bo Starnes and Grady Ingle, the owners of Windy City Grill in Hickory,
and Rick Moser, Vice President-Branch Manager of Peoples Bank's Viewmont office.
55 years, several ownership changes, three relocations and countless barbecue
sandwiches after being founded in 1946, Windy City Grill (or "Homer's" as its
known by long-time customers) is a culinary cultural landmark in Hickory's
Viewmont community.
Like the restaurant itself, the banking relationship between Bo and Rick
recently passed a milestone of their own - 20 years of building a banking
relationship together. And after the past two years at Peoples Bank, the bond
between Bo, Rick and the Bank is much like the feeling you get when go to Windy
City Grill - you just can't find anything like this anywhere else.
[Picture Omitted]
7
GROWING SUCCESS:
EXPLORING THE STORIES
BEHIND 2000.
PROFILE: A WOMAN'S VIEW
[Picture Omitted]
Jeanette Ringley, Vice President-Branch Manager, Newton Office & Vicki Lovin,
MD, A Women's View
When a woman enters A Woman's View, the women's health-care center founded by
Dr. Vickie Lovin, she is often overwhelmed by the feeling that people of this
practice truly understand her. That same spirit of understanding and respect
also underscores the care that's gone into nurturing the 10-year banking
relationship between Dr. Lovin and Jeanette Ringley, Vice President-Branch
Manager of Peoples Bank's Newton office.
In five short years, A Woman's View has become one of the area's premier centers
for progressive women's health care. The practice encompasses everything from
routine and advanced gynecological care to in-house lab and diagnostic
procedures and professional counseling. Dr. Lovin also owns and operates Pure
Reflection Spa for Wellness, a salon providing a comprehensive range of spa
services uniquely designed to refresh a woman's mind, body and spirit.
Dr. Lovin's practice and spa are renowned throughout the area for treating women
with dignity and sensitivity - the very qualities which have distinguished the
banking relationship shared by Jeanette, Dr. Lovin and Peoples Bank.
[Picture Omitted]
Judy Reese, owner of BJ Printing and Louis Fletcher, Vice President of Business
Development for Peoples Bank's Lincolnton office.
PROFILE: BJ PRINTING
Over the years, BJ Printing, Inc., has printed countless beautiful words and
images. But perhaps none is more touching than the bond that has developed
between its owner, Judy Reese, and Louis Fletcher, Vice President of Business
Development for Peoples Bank's Lincolnton office over the past 10 years.
BJ Printing, Inc., was founded in 1991 by Judy and her husband Bill. Tragically,
after running the business together for nine years, Judy lost Bill to
Amyloidosis, a rare disease he had lived with since 1997. Together with her son
Tim and her daughter Kelly, Judy and her family pulled together to continue to
honor the business Bill had devoted his life to - and their long-time banker,
Louis Fletcher, stood shoulder-to-shoulder with them, helping the family and the
business every step of the way.
One year later, Louis is proud to be handling both BJ Printing, Inc.'s and
Judy's personal accounts at Peoples Bank's new Lincolnton office. Judy says that
Louis is a true friend and a partner in the business, as well as her family's
lives. As a true community Bank, we at Peoples Bank feel that is the highest
honor of all a customer can bestow - considering us a trusted, caring and
committed partner who makes a real, measurable contribution in the life of a
family, the strength of a business and the welfare of the community.
8
[Graphic Omitted]
[Picture Omitted]
CORPORATE:
SUCCESS
President and CEO Tony W. Wolfe was quick to point out there are many reasons
the Bank's performance throughout 2000 was such an unqualified success - namely
every person who works with Peoples Bank.
"Everyone contributes to the success of the Bank - and every decision has an
impact on this Bank," Wolfe emphasized. "Together we have built the trust
internally to share our thoughts and feelings about what it takes to help our
Company be successful. This clear communication, shared vision and open
dialogue helps everyone clearly understand what we need to accomplish."
Executive Vice President and Chief Financial Officer Joseph F. Beaman, Jr.
reaffirmed that this shared understanding has been indispensable in cultivating
a Bank-wide culture of excellence. "Through training and by personal example,
our people have achieved a greater level of awareness of taking a team approach
to providing exceptional customer service and enhancing customer relationships,"
Beaman explained. "Our people make all the difference."
Wolfe and Beaman further elaborated on the corporate decisions and practices
that had such a profound impact upon operating results for 2000.
As indicated in the enclosed information, Peoples Bancorp's earnings performance
continued its favorable trend throughout the year 2000. Assets have increased
at an average annual rate of 20 percent over the past four years.
We continued a long trend of deposit growth largely attributable to our two-year
investment in Bank-wide Exceptional Customer Service (ECS) training, coupled
with specially designed deposit products.
The development and implementation of management and employee incentive programs
have served to help nurture the growth of our employees as individuals while
also enhancing the Company's earnings potential and realization of corporate
objectives.
During 2000, Peoples Bank continued its focus on the development of our
investment and real estate and appraisal subsidiaries. Today's full-service
financial center offers a complete array of traditional and non-traditional
investment products and services designed to assist our customers in meeting
their financial goals. Such a partnership is found in Peoples Investment
Services, Inc.
Peoples Real Estate and Appraisal Services, Inc., was formed in 1997 to
compliment the Bank's portfolio of services available through the mortgage loan
department. Certified appraisers provide professional expertise to customers
purchasing their first home or perhaps refinancing an existing one.
9
[Graphic Omitted]
RETAIL BANKING:
"I have to use the word 'exceptional' to describe the past year's retail banking
performance," enthused Kim Boyd, Vice President-Retail Banking. "It would not
have happened without all the people on our team. They did what was asked of
them and, in many cases, more."
Boyd credited 2000's extraordinary deposit growth of 19% to the enthusiastic
response of employees and customers alike to the Exceptional Customer Service
program. "In 2000, we had a fundamental shift in our customer service focus. We
concentrated on building customer relationships, implemented a tactical approach
to achieving business objectives, and required exceptional levels of
performance. Over the course of the last year, we have been able to see the
difference through our daily contact with our customers and bottom-line
results."
[Picture Omitted]
From left to right; (back row) Bill Cable, Tony W. Wolfe, Cliff Wike; (seated)
Joe Beaman, Lance Sellers
The objectives of the ECS program were further refined by the results of focus
group studies conducted in association with our marketing/training division.
These surveys examined customers' perceptions of the Bank, further indicating
areas in which services and programs either needed improvement or were
performing to our satisfaction. This critical data was then applied to the
program, giving ECS greater impact and effectiveness.
During the year 2000, the retail banking division received additional
recognition from the Independent Community Bankers of America (ICBA) for the
outstanding marketing and promotion of its credit card services.
COMMERCIAL BANKING:
The relationship-building strategy that proved to be so critical to the increase
in retail deposits also fueled the Bank's vigorous loan growth. "Peoples Bank
experienced 25 percent loan growth in the year 2000, excluding mortgages,"
reported Lance Sellers, Executive Vice President-Credit Administration, Mortgage
Lending and Commercial Banking. "Our lenders know the people of our markets
well, and our customers know and trust them in return." The Bank hired key
personnel with in-depth knowledge of the Lincolnton/Triangle area in hopes of
achieving a similar level of customer trust and quality-oriented service.
Peoples Bank's mortgage loan activity was also enhanced by developing
relationships with two additional mortgage providers. These arrangements have
proven beneficial to our customers by adding new, more competitively priced
mortgage options.
Another noteworthy development was the implementation of the role of the market
area executive - a market leader who helps coordinate the delivery of all
product lines to our customers.
10
MARKETING/ TRAINING:
The work of the marketing/training division was instrumental in positioning
Peoples Bank for its record growth. "We just completed our two-year Exceptional
Customer Service program, which indicated how best to build on strengths,
eliminate weaknesses and motivate employees," explained Vice President of
Marketing-Training Kim Bazzle. "All employees were required to participate in
multiple training sessions that stressed how to listen to customers, help them
tell us what they need, and exceed their expectations. This training helped
give our employees the confidence to reach out to our customers and help them
achieve their dreams."
The effectiveness of the ECS training program was further enhanced by the
invaluable customer perceptions gleaned from the 2000 focus group studies. This
data also proved to be quite advantageous in planning the launch of new retail
products and services.
[Picture Omitted]
From left to right; (back row) Kim Boyd, David Reitzel (seated) Brenda Beam, Kim
Bazzle
Successful marketing endeavors for the year 2000 included the Tell A Friend
checking referral promotion program, the bank card promotional campaign which
received recognition from the Independent Community Bankers of America (ICBA), a
Max Money Market Account and various promotions of certificates of deposit,
including one which commemorated Peoples Bank's 88th year of serving the
community.
The benefits provided by the ECS program were supplemented by an employee
incentive program which rewarded ideas that successfully upgraded efficiencies,
streamlined operations, increased deposits, or indicated other areas in which
Peoples Bank could enhance customer service.
INFORMATION AND
SUPPORT SERVICES:
The impressive growth experienced by Peoples Bank throughout 2000 would not have
been possible without the outstanding achievements of the Bank's customer
support areas including Information Services, risk management, credit
administration, the finance department, mortgage underwriting and support, mail
center operations, and the Human Resources Department. The concept of effective
teamwork has enabled the Bank's exciting pattern of growth to continue.
During the past year, Information Services which includes loan and deposit
operations, network systems, and data and items processing completed the
technological and logistical challenges of planning, coordinating and
implementing the transfer of all the Bank's operations to the new corporate
center. Simultaneously, Information Services integrated the operations of the
new Triangle and Lincolnton branch offices into Peoples Bank's Company-wide
operating system as well.
"The Bank experienced significant growth, and we were able to meet those demands
without having to expand our own division," related Bill Cable, Senior Vice
President-Information Services. "We assembled and developed a talented team of
individuals and managers from all our division's departments and services.
Together we moved the entire operating system of the Bank and didn't miss a beat
with our customers. In the process, we actually upgraded the technology of our
entire system - without experiencing a minute of downtime."
This technological investment has provided a solid foundation for greater
efficiencies, expansion and services that will continue to deliver well into the
future. Improved information and delivery systems will improve the Bank's
ability to develop new banking products and respond more quickly to customer
needs. These elements combined with an eye toward the future will provide a
superior staff and customer support that are essential to the on-going
improvement of exceptional customer service.
11
FINANCIAL HIGHLIGHTS
Dollars in Thousands Except Per Share Amounts
2000 1999 Change
- ------------------------------------------------------------------------------------
Interest income $ 40,859 $ 32,302 26%
Interest expense 19,432 14,790 31%
- ------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,548 17,087 14%
Non-interest income 3,915 3,380 16%
Non-interest expense 15,509 13,832 12%
Income taxes 2,576 2,093 23%
- ------------------------------------------------------------------------------------
Net income $ 5,378 $ 4,542 18%
- ------------------------------------------------------------------------------------
PER SHARE
Net Income* $ 1.67 $ 1.41 18%
Cash dividends* 0.39 0.34 15%
Market price at December 31* 13.50 13.41 1%
Book value at December 31* 13.37 11.81 13%
- ------------------------------------------------------------------------------------
AT YEAR-END
Loans $407,790 $336,959 21%
Available for sale securities 71,565 62,498 15%
Assets 519,002 432,435 20%
Deposits 450,073 376,634 19%
Shareholders' equity 43,039 37,998 13%
- ------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
Return on average assets 1.15% 1.09%
Return on average shareholders' equity 12.55% 11.54%
Dividend payout ratio 23.39% 23.84%
Average shareholders' equity to total average assets 9.13% 9.43%
- ------------------------------------------------------------------------------------
<FN>
*Per share amounts have been restated to reflect a 10% stock dividend during
second quarter 2000 and the 3 for 2 stock split during first quarter 1999.
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy
Statement, dated April 3, 2001, for a complete set of Consolidated Financial
Statements.
12
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
- ----------------------------------------------------------------------------------------------------------
<FN>
*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.
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy Statement, dated April
3, 2001, for a complete set of Consolidated Financial Statements.
13
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 consolidated balance sheets of Peoples Bancorp of North
Carolina, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of earnings, changes in shareholders' equity, comprehensive income
and cash flows for each of the three years in the period ended December 31,
2000. Such consolidated financial statements and our report thereon dated
January 12, 2001, expressing an unqualified opinion (which are not included
herein) are included in the proxy statement for the 2001 annual meeting of
shareholders. The accompanying condensed consolidated balance sheets and
consolidated statements of earnings are the responsibility of the Company's
management. Our responsibility is to express an opinion on such consolidated
balance sheets and consolidated statements of earnings in relation to the
complete consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of December 31, 2000 and 1999 and the related
consolidated statements of earnings for each of the three years in the period
ended December 31, 2000, is fairly stated in all material respects in relation
to the basic consolidated financial statements from which it has been derived.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 12, 2001
14
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
Assets 2000 1999
------------ ------------
Cash and due from banks $ 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
------------ ------------
Total Assets $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
------------ ------------
Total liabilities and shareholders' equity $519,001,787 432,434,854
============ ============
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy
Statement, dated April 3, 2001, for a complete set of Consolidated Financial
Statements.
15
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
FHLB 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
============ =========== ==========
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy
Statement, dated April 3, 2001, for a complete set of Consolidated Financial
Statements.
16
2000 Shareholders' equity and return
[Graphic Omitted]
17
peoples bank board of directors and officers
peoples bank board of directors
Robert C. Abernethy
Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank;
President, Secretary and Treasurer, Carolina Glove Company, Inc.
James S. Abernethy
President and Assistant Secretary, Midstate
Contractors, Inc.
Bruce R. Eckard
President, Eckard Vending Company, Inc.
John H. Elmore, Jr.
Chairman of the Board, Chief Executive Officer and 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 Company, Inc. &
President and Chief Executive Officer, Associated Brands, Inc.
Fred L. Sherrill, Jr.
Retired Furniture Manufacturer Executive
Dan Ray Timmerman, Sr.
President, Timmerman Manufacturing, Inc.
Benjamin I. Zachary
General Manager, Treasurer, Secretary and Member of the Board of Directors,
Alexander Railroad Company
peoples bank officers
Tony W. Wolfe*
President and Chief Executive Officer
Joseph F. Beaman, Jr.*
Executive Vice President, Chief Financial Officer, and Corporate Secretary
Lance A. Sellers*
Executive Vice President - Credit Administration, Mortgage Lending and
Commercial Banking
Clifton A. Wike*
Senior Vice President - Lending
William D. Cable*
Senior Vice President - Information Services
Kimberly D. Bazzle
Vice President - Marketing and Training
Brenda B. Beam
Vice President - Human Resources
Kimberly L. Boyd
Vice President - Retail Banking
David E. Reitzel
Vice President - Real Estate Administration
Nancy A. Anderson
Vice President - Mortgage Loan Originator
Patsy D. Black
Vice President - Branch Manager, Triangle Crossing
David C. Brown
Vice President and Certified Financial Planner
Steven F. Cloninger
Vice President - Credit Administration
Kay F. Deal
Vice President - Branch Manager, Conover
Duncan B. Dickinson
Vice President - Peoples Investment Services, Inc.
John R. Duncan, Jr.
Vice President - Problem Asset Manager
George S. Earp
Vice President - Finance
Barbara K. Farnsworth
Vice President - Branch Manager, Lincolnton
J. Louis Fletcher
Vice President - Business Development Officer
Ken R. Gibson
Vice President - Business Development Officer
Mark W. Gustafson
Vice President - Investment Account Executive
N. Michael Hamra
Vice President - Risk Management
Leslie R. Howard
Vice President - Branch Manager, Denver
E. Dean Lawing
Vice President - Mortgage Loan Underwriter
S. Micah Lee
Vice President - Area Executive
Tommy C. McNeely
Vice President - Business Development Officer
Cynthia H. McRee
Vice President - Branch Manager, Maiden
Rick D. Moser
Vice President - Branch Manager, Viewmont
V. Dean Norman
Vice President - Network Systems
James O. Perry
Vice President - Business Development Officer
Denalda S. Reese
Vice President - Branch Manager, Claremont and Catawba
Daniel F. Richard
Vice President - Business Development Officer
Jeanette R. Ringley
Vice President - Branch Manager, Newton
Kyle E. Sigmon
Vice President - Mortgage Loans
Mark W. Sigmon
Vice President - Area Executive
Brenda L. Terrell
Vice President - Operations Manager
* Designates an executive officer of the Bank
18
peoples bancorp board of directors and officers
peoples bancorp board of 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.
James S. Abernethy
President and Assistant Secretary, Midstate Contractors, Inc.
Bruce R. Eckard
President, Eckard Vending Company, Inc.
John H. Elmore, Jr.
Chairman of the Board, Chief Executive Officer and 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 Company, Inc. &
President and Chief Executive Officer, Associated Brands, Inc.
Fred L. Sherrill, Jr.
Retired Furniture Manufacturer Executive
Dan Ray Timmerman, Sr.
President, Timmerman Manufacturing, Inc.
Benjamin I. Zachary
General Manager, Treasurer, Secretary and Member of the Board of Directors,
Alexander Railroad Company
peoples Bancorp 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 and Assistant Treasurer
N. Michael Hamra
Vice President-Risk Management and Assistant Corporate Secretary
Krissy O. Price
Assistant Vice President and Assistant Corporate Secretary
peoples bank subsidiaries' board of directors and officers
peoples investment services, inc.
board of directors
Robert C. Abernethy
David C. Brown
Bruce R. Eckard
Larry E. Robinson
Tony W. Wolfe
officers
Tony W. Wolfe
President
Duncan B. Dickinosn
Vice President
Joseph F. Beaman, Jr.
Secretary and Treasurer
David C. Brown
Assistant Secretary
peoples real estate and appraisal services, inc.
board of directors
Robert C. Abernethy
Dan Ray Timmerman, Sr.
Tony W. Wolfe
officers
Tony W. Wolfe
President
David E. Reitzel
Vice President
Joseph F. Beaman, Jr.
Treasurer
Clifton A. Wike
Secretary
Kyle E. Sigmon
Assistant Secretary
19
shareholder & general information
annual meeting
The Annual Meeting of Shareholders of Peoples Bancorp will be held at 11:00 am,
on Thursday, May 3, 2001, at the Catawba Country Club located at 1154 Country
Club Road, Newton, North Carolina.
shareholders' luncheon
Shareholders in attendance at the Annual Meeting are cordially invited to remain
for a luncheon to be served immediately upon adjournment.
common stock
Peoples Bancorp common stock is traded on the over-the-counter (OTC) market and
quoted in the NASDAQ (National Association of Securities Dealers Automated
Quotations) National Market System, where our symbol is PEBK. Price and volume
information is contained in the Wall Street Journal and most major daily
newspapers in the "Over-the-Counter Markets" section under the National Market
System listing. Peoples Bancorp stock is marketed locally by IJL/Wachovia and
Scott & Stringfellow, Inc.
PEBK
----
NASDAQ
LISTED
[Graphic Omitted]
dividend reinvestment & stock purchase
Peoples Bancorp introduced a Dividend Reinvestment and Stock Purchase Plan in
2000 for the benefit of the Corporation's shareholders. The Plan provides for
the full or partial reinvestment of cash dividends, optional cash purchases of
the Corporation's stock, safekeeping of the share certificates, liquidation of
shares, and gifting of shares and enrollment of the designated recipients.
Registrar and Transfer Company, Cranford, New Jersey is the Plan Administrator.
For more information one may call the Investor Relations Department at Peoples
Bancorp at 828-464-5620 or 800-948-7195 or contact the Plan Administrator at
800-368-5948.
Shareholders of Peoples Bancorp are entitled to recieve dividends when and as
declared by the Board of Directors out of funds legally available therefore.
Such dividend payments are declared based upon the guidelines of North Carolina
and federal law.
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.
corporate office
Peoples Bancorp of North Carolina, Inc.
518 West C Street
P.O. Box 467
Newton, NC 28658
828/464-5620
stock transfer agent & registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
independent auditors
Porter Keadle Moore, LLP
235 Peachtree Street, NE Suite 1800
Atlanta, GA 30303
bank locations
Peoples Bancorp Center
518 West C Street
PO Box 467
Newton, NC 28658
828-464-5620
Catawba
106 North Main Street
Catawba, NC 28609
828-241-3123
Claremont
3261 East Main Street
Claremont, NC 28610
828-459-7152
Conover
213 1st Street West
Conover, NC 28613
828-464-8456
Denver
6125 Hwy 16 South
Denver, NC 28037
704-483-3050
Hickory/Springs Road
3310 Springs Road NE
Hickory, NC 28602
828-256-9229
Hickory/Viewmont
1333 2nd Street NE
Hickory, NC 28601
828-345-6262
Hiddenite
5133 NC Hwy 90 E
Hiddenite, NC 28636
828-632-0118
704-585-6631
Lincolnton
1910 E Main Street
Lincolnton, NC 28092
704-732-0097
Maiden
200 Island Ford Road
Maiden, NC 28650
828-428-9874
Newton
420 West A Street
Newton, NC 28658
828-464-5663
North Newton
2619 North Main Avenue
Newton, NC 28658
828-464-8664
Triangle Crossing
142 South Hwy 16
Denver, NC 28307
704-483-7727
704-827-2370
Off-Site Automated Teller Machine Locations
Catawba Valley Boulevard
2052 Catawba Valley Blvd SE
Hickory, NC 28602
The General Store of Denver, Inc.
6360 E NC Hwy 150
Sherrills Ford, NC 28673
[Graphic Omitted]
Equal Housing Opportunity
20
THE CORPORATE MISSION OF PEOPLES BANK, A WHOLLY-OWNED SUBSIDIARY OF PEOPLES
BANCORP OF NORTH CAROLINA, INC., IS TO BE THE BEST INDEPENDENT COMMUNITY BANK IN
ITS SERVICE AREA WHEREIN:
1 Shareholders are assured a fair return on their investment.
2 Employees are well-trained and fairly compensated.
3 Competitive products and services are efficiently delivered to meet the
needs of the communities it serves.
4 The community is diligently served with integrity and pride.
looking toward a future of continued growth:
[Picture Omitted]
It is quite gratifying to achieve the level of progress Peoples Bancorp
experienced throughout the year 2000. We view this accomplishment as a
validation of the ideals, vision, financial practices and hard work that guide
our commitment to the well-being of those we serve and those who work with us.
Now our challenge is to capitalize upon the past year's positive growth in ways
which enrich the lives of our customers, employees and shareholders. We look
forward to the future and everyone's ongoing support and confidence to help
Peoples Bancorp continue to strengthen existing financial partnerships with our
community, establish new ones and, in the process, realize that we are growing
closer to the community.
21
PEOPLES BANCORP
OF NORTH CAROLINA, INC.
Peoples Bancorp Center | 518 West C Street | PO Box 467 | Newton, North Carolina
28658
[X] PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE PEOPLES BANCORP OF NORTH CAROLINA, INC.
Annual Meeting of Shareholders
May 3, 2001 - 11:00 a.m.
(Solicited on behalf of the Board of Directors)
The undersigned holder of Common Stock of Peoples Bancorp of North
Carolina, Inc. (the "Company"), revoking all proxies heretofore given, hereby
constitutes and appoints the official proxy committee of the Company, comprised
of all of the members of the Board of Directors of the Company, each with full
power of substitution, for the undersigned and in the name, place and stead of
the undersigned to vote all of the undersigned's shares of said stock, according
to the number of votes and with all the powers the undersigned would possess if
personally present, at the 2001 Annual Meeting of Shareholders of Peoples
Bancorp of North Carolina, Inc. (the "Meeting") to be held at the Catawba
Country Club, 1154 Country Club Road, Newton, North Carolina, on May 3, 2001 at
11:00 AM., Eastern Time, and at any adjournments or postponements thereof.
With- For All
For hold Except
1. The approval of the election of the [_] [_] [_]
following named directors:
Bruce B. Eckard, Gary E. Matthews, Dan Ray Timmerman, Sr. and Benjamin I.
Zachary will serve as directors until the 2004 Annual Meeting of
Shareholders or until their successors are duly elected and qualified.
INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For
All Except" and write that nominee's name in the space provided below.
________________________________________________________________________________
For Against Abstain
2. The ratification and approval of the [_] [_] [_]
appointment of Porter Keadle Moore, LLP
as the Company's independent auditor for
the fiscal year ending December 31,
2001.
3. The Proxies are authorized to vote in their discretion upon such other
matters as may properly come before the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED
PROPOSALS.
The shares represented by this Proxy will be voted in the manner directed.
In the absence of any direction, the shares will be voted FOR each nominee
listed above, "FOR" the ratification and approval of the appointment of Porter
Keadle Moore, LLP as the Company's independent auditors for the fiscal year
ending December 31, 2001, and in accordance with their discretion on such other
matters as may properly come before the Meeting. If instructions are given with
respect to one but not all proposals, such instructions as are given will be
followed and the proxy will be voted as indicated above on the proposal(s) for
which no instructions are given.
Signature(s) should conform to names as registered. For jointly owned
shares, each owner should sign. When signing as attorney, executor,
administrator, trustee, guardian or officer of a corporation, please give full
title.
Please be sure to sign and date Date
this Proxy in the box below. ----------------------
Stockholder sign above Co-holder (if any) sign above
- --------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The above signed hereby acknowledges receipt of the Notice of Meeting and
Proxy Statement each dated April 3, 2001, relating to the Meeting and hereby
revokes any proxy or proxies heretofore given.
Each properly executed Proxy will be voted in accordance with the
specifications made above and in the discretion of the Proxies on any other
matter that may come before the meeting. Where no choice is specified, this
Proxy will be voted (i) FOR all voted nominees to serve as directors and (ii)
FOR the ratification and approval of the appointment of Porter Keadle Moore, LLP
as the Company's independent auditors for the fiscal year ending December 31,
2001 and in accordance with their discretion on such other matters as may
properly come before the Meeting.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
________________________________
________________________________
________________________________