UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 000-27205
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2132396
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658
---------------------- -----
(Address of principal executive office) (Zip Code)
(828) 464-5620
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,218,714 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AT AUGUST 10, 2001.
- --------------------------------------------------------------------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 (Unaudited) and
December 31, 2000 3
Consolidated Statements of Earnings for the three months ended June 30,
2001 and June 30, 2000 (Unaudited), and for the six months
ended June 30, 2001 and June 30, 2000 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the three months
ended June 30, 2001 and June 30, 2000 (Unaudited), and for the six
months ended June 30, 2001 and June 30, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and June 30, 2000 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
This Form 10-Q 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 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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, December 31,
Assets 2001 2000
------ ------------- ------------
(Unaudited)
Cash and due from banks $ 18,450,119 13,619,197
Federal funds sold 490,000 5,020,000
------------- ------------
Cash and cash equivalents 18,940,119 18,639,197
Investment securities available for sale 95,305,510 71,564,844
Other investments 3,856,274 2,398,873
------------- ------------
Total securities 99,161,784 73,963,717
Mortgage loans held for sale 4,050,617 1,563,700
Loans, net 447,982,015 406,226,100
Premises and equipment, net 14,993,515 12,907,968
Accrued interest receivable and other assets 5,065,598 5,701,105
------------- ------------
Total assets $ 590,193,648 519,001,787
============= ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 58,767,843 52,793,390
Interest-bearing demand 36,940,748 34,620,234
Savings 88,307,155 83,207,677
Time, $100,000 or more 156,259,603 129,111,812
Other time 147,143,108 150,340,229
------------- ------------
Total deposits 487,418,457 450,073,342
Demand notes payable to U.S. Treasury 1,600,000 1,600,000
FHLB borrowings 53,285,714 21,357,142
Accrued interest payable and other liabilities 2,307,660 2,932,284
------------- ------------
Total liabilities 544,611,831 475,962,768
------------- ------------
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 shares in 2001 and 2000 36,407,798 36,407,798
Retained earnings 8,705,241 6,627,533
Accumulated other comprehensive income 468,778 3,688
------------- ------------
Total shareholders' equity 45,581,817 43,039,019
------------- ------------
Total liabilities and shareholders' equity $ 590,193,648 519,001,787
============= ============
See accompanying notes to consolidated financial statements.
3
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Earnings (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
-------------- ------------- ------------- -------------
Interest Income:
Interest and fees on loans $ 9,419,539 8,778,731 19,216,430 16,858,090
Interest on federal funds sold 8,584 32,175 40,260 54,117
Interest on investment securities:
U.S. Treasury - 4,005 - 16,572
U.S. Government agencies 1,062,779 742,827 1,857,370 1,412,939
States and political subdivisions 239,906 247,872 487,328 502,730
Other 118,035 32,178 182,181 70,836
-------------- ------------- ------------- -------------
Total interest income 10,848,843 9,837,788 21,783,569 18,915,284
-------------- ------------- ------------- -------------
Interest expense:
Interest bearing demand deposits 75,110 113,979 150,577 224,232
Savings deposits 667,491 804,756 1,464,899 1,557,033
Time deposits 4,683,005 3,223,419 9,375,380 6,136,949
FHLB borrowings 525,484 220,660 842,898 442,449
Other 46,804 64,936 68,708 82,149
-------------- ------------- ------------- -------------
Total interest expense 5,997,894 4,427,750 11,902,462 8,442,812
-------------- ------------- ------------- -------------
Net interest income 4,850,949 5,410,038 9,881,107 10,472,472
Provision for loan losses 452,700 522,600 882,200 779,100
-------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 4,398,249 4,887,438 8,998,907 9,693,372
-------------- ------------- ------------- -------------
Other income:
Service charges 727,013 387,541 1,336,974 758,987
Other service charges and fees 103,380 88,252 231,754 182,984
Gain (loss) on sale of securities 203,463 - 194,727 -
Mortgage banking income 250,848 144,236 455,674 234,145
Insurance and brokerage commissions 109,625 46,194 164,668 72,694
Miscellaneous 595,993 474,949 1,208,424 754,999
-------------- ------------- ------------- -------------
Total other income 1,990,322 1,141,172 3,592,221 2,003,809
-------------- ------------- ------------- -------------
Other expense:
Salaries and employee benefits 2,389,034 2,191,907 4,836,998 4,413,302
Occupancy 767,682 616,000 1,462,482 1,207,834
Other 1,213,421 1,232,322 2,230,397 2,212,040
-------------- ------------- ------------- -------------
Total other expenses 4,370,137 4,040,229 8,529,877 7,833,176
-------------- ------------- ------------- -------------
Earnings before income taxes 2,018,434 1,988,381 4,061,251 3,864,005
Income taxes 668,000 646,200 1,339,800 1,252,200
-------------- ------------- ------------- -------------
Net earnings $ 1,350,434 1,342,181 2,721,451 2,611,805
============== ============= ============= =============
Basic earnings per share $ 0.42 0.42 0.85 0.81
============== ============= ============= =============
Diluted earnings per share $ 0.42 0.42 0.84 0.81
============== ============= ============= =============
Cash dividends declared per share $ 0.10 0.10 0.20 0.19
============== ============= ============= =============
See accompanying notes to consolidated financial statements.
4
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
--------------- ------------- -------------- --------------
Net earnings $ 1,350,434 1,342,181 2,721,451 2,611,805
--------------- ------------- -------------- --------------
Other comprehensive income, net
of tax:
Unrealized gains (losses) on
investment securities
available for sale:
Unrealized gains
(losses) arising during
the period, net of
taxes of $51,672,
$7,859, $372,574
and $(124,657),
respectively (80,991) 12,318 583,971 (195,387)
Reclassification
adjustment for (gains)
losses included in net
earnings, net of taxes of
$(79,249), $0, $(75,846)
and $0, respectively (124,214) - (118,881) -
--------------- ------------- -------------- --------------
Other comprehensive income (205,205) 12,318 465,090 (195,387)
--------------- ------------- -------------- --------------
Comprehensive income $ 1,145,229 1,354,499 3,186,541 2,416,418
=============== ============= ============== ==============
See accompanying notes to consolidated financial statements.
5
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2001 and 2000
2001 2000
-------------- ------------
Cash flows from operating activities:
Net earnings $ 2,721,451 2,611,805
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation, amortization and accretion 733,913 363,217
Provision for loan losses 882,200 779,100
Loss (gain) on sale of investment securities (194,727) -
Loss (gain) on sale of mortgage loans (10,000) 19,416
Gain on sale of premises and equipment (2,818) -
Gain on sale of other real estate 4,419 2,950
Change in:
Other assets 429,831 (190,835)
Other liabilities (624,624) 1,012,451
Mortgage loans held for sale (2,476,917) 895,980
-------------- ------------
Net cash provided (used) by operating activities 1,462,728 5,494,084
-------------- ------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale (50,837,358) (7,558,732)
Proceeds from calls and maturities of investment securities
available for sale 10,437,830 4,197,420
Proceeds from sales of investment securities available for sale 17,604,375 -
Change in other investments (5,957,401) (838,773)
Net change in loans (42,833,115) (34,859,996)
Purchase of premises and equipment (5,188,991) (965,066)
Proceeds from sale of premises and equipment 2,470,180 -
Proceeds from sale of other real estate 12,731 24,500
-------------- ------------
Net cash used in investing activities (69,791,749) (40,000,647)
-------------- ------------
Cash flows from financing activities:
Net change in deposits 37,345,115 29,015,835
Net change in FHLB borrowings 31,928,572 (71,429)
Net change in federal funds purchased - 5,140,000
Cash dividends (643,743) (614,503)
Cash paid in lieu of fractional shares - (3,773)
-------------- ------------
Net cash provided by financing activities 68,629,944 33,466,130
-------------- ------------
Net change in cash and cash equivalents 300,923 (1,040,433)
Cash and cash equivalents at beginning of year 18,639,197 16,997,311
-------------- ------------
Cash and cash equivalents at end of year $ 18,940,120 15,956,878
============== ============
6
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2001 and 2001
(Continued)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $11,936,405 8,357,998
Income taxes $ 1,740,593 829,000
Noncash investing and financing activities:
Change in net unrealized gain (loss) on investment
securities available for sale, net of tax $ 465,090 (195,387)
Transfer of loans to other real estate $ 195,000 -
See accompanying notes to consolidated financial statements.
7
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
(1) Summary of Significant Accounting Policies
----------------------------------------------
The consolidated financial statements include the financial statements of
Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary,
Peoples Bank. All significant intercompany balances and transactions have
been eliminated in consolidation.
A description of the Company's significant accounting policies can be found
in Note 1 of the Notes to Consolidated Financial Statements in the
Company's 2001 Annual Report to Shareholders which is Appendix A to the
Proxy Statement for the May 3, 2001 Annual Meeting of Shareholders. The
consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than
normal accruals) necessary for a fair presentation of the financial
position and results of operations for the periods presented have been
included.
Management of the Company has made a number of estimates and assumptions
relating to reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) Allowance for Loan Losses
----------------------------
The following is an analysis of the allowance for loan losses for the six
months ended June 30, 2001 and 2000:
2001 2000
----------- ----------
Balance, beginning of period $4,713,227 3,924,348
Provision for loan losses 882,200 779,100
Less:
Charge-offs (243,359) (430,212)
Recoveries 132,105 31,444
----------- ----------
Net charge-offs (111,254) (398,768)
----------- ----------
Balance, end of period $5,484,173 4,304,680
=========== ==========
(3) Net Earnings Per 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. The reconciliation of the amounts used in the
computation of both "basic earnings per share" and "diluted earnings per
share" for the three months and six months ended June 30, 2001 are as
follows:
Per Share
For the three months ended June 30, 2001 Net Earnings Common Shares Amount
- ---------------------------------------- ------------- ------------- ----------
Basic earnings per share $ 1,350,434 3,218,714 $ 0.42
==========
Effect of dilutive securities:
Stock options - 7,120
------------- -------------
Diluted earnings per share $ 1,350,434 3,225,834 $ 0.42
============= ============= ==========
8
Per Share
For the six months ended June 30, 2001 Net Earnings Common Shares Amount
- -------------------------------------- ------------- ------------- ----------
Basic earnings per share $ 2,721,451 3,218,714 $ 0.85
==========
Effect of dilutive securities:
Stock options - 6,885
------------- -------------
Diluted earnings per share $ 2,721,451 3,225,599 $ 0.84
============= ============= ==========
For the three months and six months ended June 30, 2000, "basic 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 period ended June 30, 2000 is computed based on
the weighted average shares outstanding of 3,218,714.
(4) Derivative Instruments
-----------------------
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS
NO. 138, which establishes accounting and reporting standards for hedging
activities 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. The
accounting for the changes in the fair value of a derivative depends on the
intended use of the derivative instrument at inception. The change in fair
value of instruments used as fair value hedges is accounted for in the
earnings of the period simultaneous with accounting for the fair value
change of the item being hedged. The change in fair value of the effective
portion of cash flow hedges is accounted for in comprehensive income rather
than earnings. The change in fair value of derivative instruments that are
not intended as a hedge is accounted for in the earnings of the period of
the change.
During first quarter 2001, the Company entered into an interest rate floor
contract as a means of managing its interest rate risk. Interest rate
floors are used to protect certain designated variable rate financial
instruments from the downward effects of their repricing in the event of a
decreasing rate environment. The total cost of the interest rate floor was
$417,500 and it was not management's intention to use the floor as a fair
value or cash flow hedge, as defined in SFAS No. 133. The Company sold the
interest rate floor contract during the quarter ended June 30, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary. Net earnings for the second quarter of 2001 was $1.4 million, an
increase of $8,000 or 1% over the $1.3 million earned in the same period in
2000. Both basic and diluted net earnings per share for the quarters ended June
30, 2001 and June 30, 2000 was $0.42. Annualized return on average assets was
0.95% for the three months ended June 30, 2001 compared to 1.18% for the same
period in 2000, and annualized return on average shareholders' equity was 11.79%
versus 13.45%, respectively.
Net earnings for the six months ended June 30, 2001 was $2.7 million, an
increase of 4% over the $2.6 million earned in the first six months of 2000.
Basic earnings per share for this period increased 4% to $0.85 from $0.81 for
the six months ended June 30, 2000. Diluted earnings per share for the six
months ended June 30, 2001 and June 30, 2000 was $0.84 and $0.81, respectively.
Annualized return on average assets was 0.99% for the first six months of 2001
compared to 1.17% for the same period in 2000, and annualized return on average
shareholders' equity was 11.85% versus 13.03%, respectively.
Net Interest Income. Net interest income, the major component of the
Company's net income, was $4.9 million for the three months ended June 30, 2001
a decrease of 10% from the $5.4 million earned in the same period in 2000. The
decrease from 2000 second quarter net interest income was primarily attributable
to declining interest rates during first quarter 2001.
Interest income increased $1.0 million or 10% for the three months ended
June 30, 2001 compared with the same period in 2000. The increase was due to an
increase in the volume of earning assets, which resulted from an increase in
loan volume, partially offset by a decrease in the yield on earning assets which
is attributable to decreases in the Bank's prime commercial lending rate.
Interest expense increased $1.6 million or 35% for the three months ended
June 30, 2001 compared with the same period in 2000. The increase in interest
expense was due to an increase in the cost of funds to 5.15% for the three
months ended June 30, 2001 from 4.96% for the same period in 2000, combined with
an increase in volume of interest bearing liabilities.
Net interest income for the six month period ended June 30, 2001 was $9.9
million, a decrease of 6% from net interest income of $10.5 million for the six
months ended June 30, 2000. This decrease is attributable to declining interest
rates during 2001, which resulted in a decrease in the annualized tax equivalent
net yield on earning assets to 3.93% for the six months ended June 30, 2001 from
5.06% for the six months ended June 30, 2000.
Interest income increased $2.9 million or 15% to $21.8 million for the six
months ended June 30, 2001 compared to $18.9 million for the same period in
2000. The increase was due to an increase in the volume of average earning
assets, which resulted from an increase in loan volume, partially offset by a
decrease in the yield on earning assets which is attributable to decreases in
the Bank's prime commercial lending rate. Average loans increased 22% to $435.1
million, while average investment securities available for sale increased 21% to
$79.7 million in the six months ended June 30, 2001 compared to the same period
in 2000. All other interest-earning assets including federal funds sold
increased to an average of $6.8 million in the six months ended June 30, 2001
from $4.2 million in the same period in 2000. The tax equivalent yield on
average earning assets decreased to 8.56% for the six months ended June 30, 2001
from 9.04% for the six months ended June 30, 2000.
Interest expense increased 41% to $11.9 million in the six months ended
June 30, 2001 compared to $8.4 million for the corresponding period in 2000. The
increase resulted from an increase in the volume of interest bearing liabilities
coupled with an increase in the average rate paid on interest bearing
liabilities. Average
10
interest bearing liabilities increased 28% to $449.0 million for the six months
ended June 30, 2001 from $350.7 million for the six months ended June 30, 2000.
This increase is primarily attributable to the increase in average interest
bearing deposits to $413.7 million in the six months ended June 30, 2001 from
$333.8 million in the same period in 2000. The average rate paid on interest
bearing liabilities increased to 5.35% for the six months ended June 30, 2001
from 4.83% for the six months ended June 30, 2000.
Provision for Loan Losses. For the three months ended June 30, 2001 a
contribution of $453,000 was made to the provision for loan losses compared to a
contribution of $523,000 to the provision for loan losses for the three months
ended June 30, 2000. The increased contribution to the provision for loan
losses for the quarter ended June 30, 2000 was in response to unusually strong
loan growth during the period.
For the six months ended June 30, 2001 a contribution of $882,000 was made
to the provision for loan losses compared to a contribution of $779,000 to the
provision for loan losses for the six months ended June 30, 2000. The increase
in the provision for loan losses reflects a precautionary approach in response
to declining economic conditions.
Non-Interest Income. Total non-interest income was $2.0 million in the
second quarter of 2001, an increase of 74% over the $1.1 million earned in the
second quarter of 2000. Service charges on deposit accounts increased 88% to
$727,000 for the second quarter of 2001 due to the growth in the deposit base
coupled with fees arising from a new service charge designed to automatically
advance funds to assist customers in the event of checking account overdrafts.
The Company reported a net gain on sale of securities for the quarter ended June
30, 2001 of $203,000 compared to no securities gains or losses during the
comparable period of 2000. Mortgage banking income increased 74% to $251,000 in
the second quarter of 2001 compared to $144,000 for the second quarter of 2000.
The increase in mortgage banking income resulted from a strong demand for
mortgage loan services. Income from insurance and brokerage commissions
increased 137% to $110,000 in the second quarter of 2001 compared to $46,000 for
the same period of 2000. This increase is primarily attributable to increased
activity associated with the Bank's investment subsidiary, Peoples Investment
Services, Inc. Miscellaneous non-interest income increased 25% to $596,000 for
the three months ended June 30, 2001. The increase reflects accounting treatment
associated with the increase in value of an interest rate floor contract and
increased income from appraisal related services.
Total non-interest income was $3.6 million for the six months ended June
30, 2001, an increase of 79% over the $2.0 million earned in the same period of
2000. Service charges on deposit accounts increased 76% to $1.3 million for the
six months ended June 30, 2001 due to the growth in the deposit base coupled
with fees arising from a new service charge designed to automatically advance
funds to assist in the event of checking account overdrafts. The Company
reported a net gain of sale of securities for the first six months of 2001 of
$195,000 compared to no securities gains or losses during the comparable period
of 2000. Mortgage banking income increased 95% to $456,000 in the six months
ended June 30, 2001 from $234,000 for the six months ended June 30, 2000 due to
a strong demand for mortgage loan services. Income from insurance and brokerage
commissions increased 127% for the first six months of 2001 compared to the same
period in 2000. This increase is primarily attributable to increased activity
associated with the Bank's investment subsidiary, Peoples Investment Services,
Inc. Miscellaneous non-interest income increased 60% to $1.2 million for the
six months ended June 30, 2001 from $755,000 for the six months ended June 30,
2000. The increase reflects accounting treatment associated with the increase
in value of an interest rate floor contract and increased income from appraisal
related services.
Non-Interest Expense. Total non-interest expense was $4.4 million in the
second quarter of 2001, an increase of 8% over the same period in 2000. Salary
and employee benefits increased 9% for the three months ended June 30, 2001 as
compared to the same period of 2000. This increase is primarily due to merit and
promotional increases and an increase in the number of employees to service
growth in the customer base as well as additional staffing at new branch
locations. Occupancy expense increased 25% due to increased overhead expenses
associated with branch renovations and the Company's new corporate headquarters
coupled with an increase in rental expense attributable to temporary banking
facilities.
Total non-interest expense was $8.5 million in the six months ended June
30, 2001, an increase of 9%
11
over the same period in 2000. Salary and employee benefits increased 10% for the
six months ended June 30, 2001 as compared to the same period of 2000. This
increase is primarily due to merit and promotional increases and an increase in
the number of employees to service growth in the customer base as well as
additional staffing at new branch locations. Occupancy expense increased 21% due
to increased overhead expenses associated with new branches, existing branch
renovations and the Company's new corporate headquarters coupled with an
increase in rental expense attributable to temporary banking facilities.
Income Taxes. The Company reported income taxes of $668,000 and $646,000
for the second quarters of 2001 and 2000, respectively. This represented
effective tax rates of 33% and 32% for the respective periods.
The Company reported income taxes of $1.3 million for the six-month periods
ending June 30, 2001 and 2000, respectively. This represented effective tax
rates of 33% and 32% for the respective periods.
ANALYSIS OF FINANCIAL CONDITION
Investment Securities. Available-for-sale securities amounted to $95.3
million at June 30, 2001 compared to $71.6 million at December 31, 2000. This
increase reflects the purchase of approximately $30,000,000 in agency securities
funded by a $30,000,000 Federal Home Loan Bank borrowing. Average investment
securities for the six months ended June 30, 2001 amounted to $77.4 million
compared to $66.2 million for the year ended December 31, 2000.
Loans. At June 30, 2001, total loans amounted to $453.5 million compared to
$410.9 million at December 31, 2000, an increase of 10%. This loan growth
reflects a continuation of strong loan demand in the Bank's market area. Average
loans represented 84% of total earning assets for the six months ended June 30,
2001 and the year ended December 31, 2000. Mortgage loans held for sale were
$4.1 million at June 30, 2001, an increase of 159% from the December 31, 2000
balance of $1.6 million. The increase in mortgage loans held for sale reflects
an increase in mortgage loan volume due to a decrease in mortgage loan rates.
Asset Quality. Non-performing assets totaled $4.9 million at June 30, 2001
or 0.83% of total assets, compared to $6.1 million at December 31, 2000 or 1.17%
of total assets. Non-accrual loans were $4.6 million at June 30, 2001, a
decrease of $790,000 from non-accruals of $5.4 million at December 31, 2000. As
a percentage of total loans outstanding, non-accrual loans were 1.02% at June
30, 2001 compared to 1.32% at December 31, 2000. This decrease of 30 basis
points reflects management's focus on improvement in this area, coupled with
growth in the loan portfolio. Loans ninety days past due and still accruing
amounted to $71,000 and $545,000 at June 30, 2001 and December 31, 2000,
respectively. The allowance for loan losses at June 30, 2001 amounted to $5.5
million or 1.21% of total loans compared to $4.7 million or 1.15% of total loans
at December 31, 2000.
Deposits. Total deposits at June 30, 2001 were $487.4 million, an increase
of 8% over deposits of $450.1 million at December 31, 2000. Certificates of
deposit in amounts of $100,000 or more totaled $156.3 million at June 30, 2001,
compared to $129.1 million at December 31, 2000. This increase reflects growth
arising from the Bank's entry into new markets, successful marketing strategies,
and the general strength of the deposit base in the Bank's service area.
Borrowed Funds. Federal Home Loan Bank borrowings were $53.3 million at
June 30, 2001 compared to $21.4 million at December 31, 2000. This increase
reflects a $30,000,000 borrowing which allowed the Bank to purchase
approximately $30,000,000 in agency securities. This transaction enabled the
Bank to lock in a positive spread in net interest income. The average balance
of Federal Home Loan Bank borrowings for the six months ended June 30, 2001 was
$32.1 million compared to $15.8 million for the year ended December 31, 2000.
At June 30, 2001, Federal Home Loan Bank borrowings with maturities exceeding
one year amounted to $52.3 million. The Company had no federal funds purchased
as of June 30, 2001 or December 31, 2000.
Capital Structure. Shareholders' equity at June 30, 2001 was $45.6 million
compared to $43.0 million at December 31, 2000. In addition, at June 30, 2001
and December 31, 2000, unrealized gains and losses, net of taxes, in the
available-for-sale securities portfolio amounted to a gain of $469,000 and a
gain of $4,000,
12
respectively. Annualized return on average equity for the six months ended June
30, 2001 was 11.85% compared to 12.55% for the year ended December 31, 2000.
Total cash dividends paid as of June 30, 2001 amounted to $644,000 an increase
of 5% compared to total cash dividends of $615,000 paid for the first six months
of 2000.
Under the 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 8.97% and 10.11% at June
30, 2001 and December 31, 2000, 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 10.07% and 11.22% at June 30, 2001 and December 31, 2000,
respectively. In addition to the Tier I and total risk-based capital
requirements, financial institutions are also required 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 8.17% and 9.10% at June 30, 2001 and
December 31, 2000, 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 June 30, 2001
and December 31, 2000.
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 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 (FHLB) and The Bankers Bank, and is also able to purchase federal funds
from other financial institutions. At June 30, 2001, the Bank had a line of
credit with the FHLB equal to 20% of the Bank's total assets, with an
outstanding balance of $53.3 million. The Bank also has the ability to borrow
up to $16.5 million for the purchase of overnight federal funds from three
correspondent financial institutions. 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 24.84% at June 30, 2001 and 27.03% at December 31, 2000.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of June 30, 2001 from that presented in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of the management, the Company is not involved in
any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Shareholders' Meeting - May 3, 2001
(b) Directors elected at the meeting are as follows: Bruce R.
Eckard, Gary E. Matthews, Dan Ray Timmerman, Sr., and
Benjamin I. Zachary.
Continuing directors include: John H. Elmore, Jr., Charles
F. Murray, and Fred L. Sherrill, Jr., Robert C. Abernethy,
James S. Abernethy, and Larry E. Robinson.
(c) At the May 3, 2001 Annual Shareholders Meeting the following
items were submitted to a vote of shareholders:
Election of Directors - The following directors were elected
for a term of three years.
Vote For Withhold Authority
-------- ------------------
Bruce R. Eckard 2,963,794 6,233
Gary E. Matthews 2,963,794 6,233
Dan Ray Timmerman, Sr. 2,963,242 6,785
Benjamin I. Zachary 2,963,794 6,233
Ratification of appointment of Independent Public
Accountants - Porter Keadle Moore LLP
Votes For - 2,969,944, Votes Against - 5,440, Votes
Abstained - 2,972
(d) Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit (3)(i) Articles of Incorporation of Peoples
Bancorp of North Carolina, Inc.,
incorporated by reference to Exhibit
(3)(i) to the Form 8-A filed with the
Securities and Exchange Commission on
September 2, 1999
Exhibit (3)(ii) Bylaws of Peoples Bancorp of North
Carolina, Inc. incorporated by reference
to Exhibit (3)(ii) to the Form 8-A filed
with the Securities and Exchange
Commission on September 2, 1999
Exhibit (4) Specimen Stock Certificate, incorporated
by reference to Exhibit (4) to the Form
8-A filed with the Securities and
Exchange Commission on September 2, 1999
Exhibit (10)(a) Employment Agreement between Peoples
Bank and Tony W. Wolfe incorporated by
reference to Exhibit (10)(a) to the Form
10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(b) Employment Agreement between Peoples
Bank and Joseph F. Beaman, Jr.
incorporated by reference to Exhibit
(10)(b) to the Form 10-K filed with the
Securities and Exchange Commission on
March 30, 2000
Exhibit (10)(c) Employment Agreement between Peoples
Bank and Clifton A. Wike incorporated by
reference to Exhibit (10)(c) to the Form
10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(d) Employment Agreement between Peoples
Bank and William D. Cable incorporated
by reference to Exhibit (10)(d) to the
Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(e) Employment Agreement between Peoples
Bank and Lance A. Sellers incorporated
by reference to Exhibit (10)(e) to the
Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc.
Omnibus Stock Ownership and Long Term
Incentive Plan incorporated by reference
to Exhibit (10)(f) to the Form 10-K
filed with the Securities and Exchange
Commission on March 30, 2000
(b) Reports on Form 8-K
During the quarter ended June 30, 2001 the Company filed no
reports on Form 8-K.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Peoples Bancorp of North Carolina, Inc.
August 10, 2001 By: /s/ Tony W. Wolfe
-------------------- ---------------------------------------
Date Tony W. Wolfe
President and Chief Executive Officer
(Principal Executive Officer)
August 10, 2001 By: /s/ Joseph F. Beaman, Jr.
-------------------- ---------------------------------------
Date Joseph F. Beaman, Jr.
Executive Vice President and Chief
Financial Officer
(Principal Financial and Principal
Accounting Officer)
17