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 SEPTEMBER 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 OCTOBER 29, 2001.
--------------------------------------------------------------------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000 3
Consolidated Statements of Earnings for the three months
ended September 30, 2001 and September 30, 2000 (Unaudited),
and for the nine months ended September 30, 2001 and
September 30, 2000 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
three months ended September 30, 2001 and September 30, 2000
(Unaudited), and for the nine months ended September 30,
2001 and September 30, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 and September 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 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16-17
Signatures 18
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
September 30, December 31,
Assets 2001 2000
------ --------------- -------------
(Unaudited)
Cash and due from banks $ 13,354,100 13,619,197
Federal funds sold 8,114,000 5,020,000
--------------- -------------
Cash and cash equivalents 21,468,100 18,639,197
Investment securities available for sale 90,205,104 71,564,844
Other investments 3,856,273 2,398,873
--------------- -------------
Total securities 94,061,377 73,963,717
Mortgage loans held for sale 2,317,535 1,563,700
Loans, net 463,246,885 406,226,100
Premises and equipment, net 14,863,585 12,907,968
Accrued interest receivable and other assets 4,768,703 5,701,105
--------------- -------------
Total assets $ 600,726,185 519,001,787
=============== =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Non-interest bearing demand $ 55,228,791 52,793,390
NOW, MMDA & savings 133,114,029 117,827,911
Time, $100,000 or more 170,464,816 129,111,812
Other time 138,983,600 150,340,229
--------------- -------------
Total deposits 497,791,236 450,073,342
Demand notes payable to U.S. Treasury 1,600,000 1,600,000
FHLB borrowings 52,214,286 21,357,142
Accrued interest payable and other liabilities 2,244,046 2,932,284
--------------- -------------
Total liabilities 553,849,568 475,962,768
--------------- -------------
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 9,769,635 6,627,533
Accumulated other comprehensive income 699,184 3,688
--------------- -------------
Total shareholders' equity 46,876,617 43,039,019
--------------- -------------
Total liabilities and shareholders' equity $ 600,726,185 519,001,787
=============== =============
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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------- ------------------- ------------------ -------------------
Interest Income:
Interest and fees on loans $ 9,086,321 9,638,520 28,302,751 26,496,610
Interest on federal funds sold 63,627 65,906 103,887 120,023
Interest on investment securities:
U.S. Treasury - - - 16,572
U.S. Government agencies 1,063,023 767,005 2,920,393 2,179,944
States and political subdivisions 222,524 239,858 709,852 742,588
Other 132,621 42,638 314,803 113,474
------------------- ------------------- ------------------ -------------------
Total interest income 10,568,116 10,753,927 32,351,686 29,669,211
------------------- ------------------- ------------------ -------------------
Interest expense:
NOW, MMDA & savings deposits 777,098 954,097 2,392,574 2,735,362
Time deposits 4,516,969 3,922,411 13,892,349 10,059,360
FHLB borrowings 650,895 265,217 1,493,793 707,666
Other 7,432 33,971 76,141 116,119
------------------- ------------------- ------------------ -------------------
Total interest expense 5,952,394 5,175,696 17,854,857 13,618,507
------------------- ------------------- ------------------ -------------------
Net interest income 4,615,722 5,578,231 14,496,829 16,050,704
Provision for loan losses 759,788 640,000 1,641,988 1,419,100
------------------- ------------------- ------------------ -------------------
Net interest income after provision
for loan losses 3,855,934 4,938,231 12,854,841 14,631,604
------------------- ------------------- ------------------ -------------------
Other income:
Service charges 712,574 403,461 2,049,548 1,162,447
Other service charges and fees 105,740 92,831 337,494 275,815
Gain (loss) on sale of securities 512,830 (483,472) 707,557 (483,472)
Mortgage banking income 226,336 (155,092) 682,010 79,054
Insurance and brokerage commissions 102,446 42,364 267,114 115,058
Miscellaneous 449,989 968,064 1,658,413 1,723,062
------------------- ------------------- ------------------ -------------------
Total other income 2,109,915 868,156 5,702,136 2,871,964
------------------- ------------------- ------------------ -------------------
Other expense:
Salaries and employee benefits 2,001,725 2,317,036 6,838,724 6,730,338
Occupancy 774,685 653,340 2,237,166 1,861,174
Other 1,087,574 760,831 3,317,971 2,972,871
------------------- ------------------- ------------------ -------------------
Total other expenses 3,863,984 3,731,207 12,393,861 11,564,383
------------------- ------------------- ------------------ -------------------
Earnings before income taxes 2,101,865 2,075,180 6,163,116 5,939,185
Income taxes 715,600 689,300 2,055,400 1,941,500
------------------- ------------------- ------------------ -------------------
Net earnings $ 1,386,265 1,385,880 4,107,716 3,997,685
=================== =================== ================== ===================
Basic earnings per share $ 0.43 0.43 1.28 1.24
=================== =================== ================== ===================
Diluted earnings per share $ 0.43 0.43 1.27 1.24
=================== =================== ================== ===================
Cash dividends declared per share $ 0.10 0.10 0.30 0.29
=================== =================== ================== ===================
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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------------- ------------------ ------------------- ------------------
Net earnings 1,386,265 1,385,880 4,107,716 3,997,685
------------------------- ------------------ ------------------- ------------------
Other comprehensive income, net of tax:
Unrealized gains on
investment securities
available for sale:
Unrealized gains
arising during
the period, net of
taxes of $346,747,
$242,064, $719,321
and $117,407,
respectively 543,489 379,410 1,127,460 184,022
Reclassification
adjustment for (gains)
losses included in net
earnings, net of taxes of
$(199,747), $188,312,
$(275,593) and $188,312,
respectively (313,083) 295,160 (431,964) 295,160
------------------------- ------------------ ------------------- ------------------
Other comprehensive income 230,406 674,570 695,496 479,182
------------------------- ------------------ ------------------- ------------------
Comprehensive income 1,616,671 2,060,450 4,803,212 4,476,867
========================= ================== =================== ==================
See accompanying notes to consolidated financial statements.
5
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2001 and 2000
2001 2000
------------- ------------
Cash flows from operating activities:
Net earnings $ 4,107,716 3,997,685
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation, amortization and accretion 1,166,392 1,212,026
Provision for loan losses 1,641,988 1,419,100
Loss (gain) on sale of investment securities (707,557) 483,472
Loss (gain) on sale of mortgage loans (18,489) 293,520
Gain on sale of premises and equipment (2,818) (1,329,736)
Gain on sale of other real estate 16,840 2,950
Change in:
Other assets 476,328 (1,541,866)
Other liabilities (688,238) 1,814,002
Mortgage loans held for sale (735,346) 385,418
------------- ------------
Net cash provided by operating activities 5,256,816 6,736,571
------------- ------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale (71,634,940) (25,526,829)
Proceeds from calls and maturities of investment securities
available for sale 15,066,859 5,548,216
Proceeds from sales of investment securities available for sale 39,736,019 18,129,483
Change in other investments (1,457,400) (838,773)
Net change in loans (58,857,773) (49,662,841)
Purchase of premises and equipment (3,474,006) (2,702,828)
Proceeds from sale of premises and equipment 523,595 1,875,000
Proceeds from sale of other real estate 60,310 24,500
------------- ------------
Net cash used in investing activities (80,037,336) (53,154,072)
------------- ------------
Cash flows from financing activities:
Net change in deposits 47,717,894 52,797,208
Change in demand notes payable to U.S. Treasury - (262,174)
Net change in FHLB borrowings 30,857,144 2,857,143
Cash dividends (965,615) (936,375)
Cash paid in lieu of fractional shares - (3,773)
------------- ------------
Net cash provided by financing activities 77,609,423 54,452,029
------------- ------------
Net change in cash and cash equivalents 2,828,903 8,034,528
Cash and cash equivalents at beginning of period 18,639,197 16,997,311
------------- ------------
Cash and cash equivalents at end of period $ 21,468,100 25,031,839
============= ============
6
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2001 and 2000
(Continued)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 17,871,361 13,206,542
Income taxes $ 2,420,593 1,845,000
Noncash investing and financing activities:
Change in net unrealized gain (loss) on investment
securities available for sale, net of tax $ 695,496 479,182
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 nine
months ended September 30, 2001 and 2000:
2001 2000
----------- ----------
Balance, beginning of period $4,713,227 3,924,348
Provision for loan losses 1,641,988 1,419,100
Less:
Charge-offs (608,455) (755,165)
Recoveries 160,567 52,050
----------- ----------
Net charge-offs (447,888) (703,115)
----------- ----------
Balance, end of period $5,907,327 4,640,333
=========== ==========
(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 nine months ended September 30, 2001 are as
follows:
For the three months ended September 30, 2001
----------------------------------------------------
Per Share
Net Earnings Common Shares Amount
------------- ------------- ----------
Basic earnings per share $ 1,386,265 3,218,714 $ 0.43
==========
Effect of dilutive securities:
Stock options - 18,403
------------- -------------
Diluted earnings per share $ 1,386,265 3,237,117 $ 0.43
============= ============= ==========
8
For the nine months ended September 30, 2001
---------------------------------------------------
Per Share
Net Earnings Common Shares Amount
------------- ------------- ----------
Basic earnings per share $ 4,107,716 3,218,714 $ 1.28
==========
Effect of dilutive securities:
Stock options - 10,768
------------- -------------
Diluted earnings per share $ 4,107,716 3,229,482 $ 1.27
============= ============= ==========
For the three months and nine months ended September 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 September 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 third quarter of 2001 and 2000 were $1.4
million. Both basic and diluted net earnings per share for the quarters ended
September 30, 2001 and September 30, 2000 were $0.43. Annualized return on
average assets was 0.93% for the three months ended September 30, 2001 compared
to 1.15% for the same period in 2000, and annualized return on average
shareholders' equity was 11.85% versus 13.38%, respectively.
Net earnings for the nine months ended September 30, 2001 was $4.1 million,
an increase of 3% over the $4.0 million earned in the first nine months of 2000.
Basic earnings per share for this period increased 3% to $1.28 from $1.24 for
the nine months ended September 30, 2000. Diluted earnings per share for the
nine months ended September 30, 2001 and September 30, 2000 were $1.27 and
$1.24, respectively. Annualized return on average assets was 0.97% for the first
nine months of 2001 compared to 1.17% for the same period in 2000, and
annualized return on average shareholders' equity was 11.62% versus 12.85%,
respectively.
Net Interest Income. Net interest income, the major component of the
Company's net income, was $4.6 million for the three months ended September 30,
2001 a decrease of 17% from the $5.6 million earned in the same period in 2000.
The decrease from 2000 third quarter net interest income was primarily
attributable to declining interest rates throughout 2001.
Interest income decreased $186,000 or 2% for the three months ended
September 30, 2001 compared with the same period in 2000. This decrease is
attributable to a reduction in the yield on earning assets due to decreases in
the Bank's prime commercial lending rate. The reduction in yield was partially
offset by an increase in loan volume.
Interest expense increased $777,000 or 15% for the three months ended
September 30, 2001 compared with the same period in 2000. The increase in
interest expense was due to an increase in volume of average interest bearing
liabilities, partially offset by a decrease in the average cost of funds to
4.80% for the three months ended September 30, 2001 from 5.37% for the same
period in 2000.
Net interest income for the nine month period ended September 30, 2001 was
$14.5 million, a decrease of 10% from net interest income of $16.1 million for
the nine months ended September 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 3.71% for the nine
months ended September 30, 2001 from 5.02% for the nine months ended September
30, 2000.
Interest income increased $2.7 million or 9% to $32.4 million for the nine
months ended September 30, 2001 compared to $29.7 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 $445.0
million, while average investment securities available for sale increased 27% to
$83.5 million in the nine months ended September 30, 2001 compared to the same
period in 2000. All other interest-earning assets including federal funds sold
increased to an average of $6.6 million in the nine months ended September 30,
2001 from $5.2 million in the same period in 2000. The tax equivalent yield on
average earning assets decreased to 8.17% for the nine months ended September
30, 2001 from 9.18% for the nine months ended September 30, 2000.
Interest expense increased 31% to $17.9 million for the nine months ended
September 30, 2001 compared to $13.6 million for the corresponding period in
2000. The increase resulted from an increase in the volume of average interest
bearing liabilities coupled with an increase in the average rate paid on
interest bearing liabilities.
10
Average interest bearing liabilities increased 28% to $463.5 million for the
nine months ended September 30, 2001 from $361.3 million for the nine months
ended September 30, 2000. This increase is primarily attributable to the
increase in average interest bearing deposits to $422.0 million in the nine
months ended September 30, 2001 from $343.6 million in the same period in 2000.
The average rate paid on interest bearing liabilities increased to 5.15% for the
nine months ended September 30, 2001 from 5.02% for the nine months ended
September 30, 2000.
Provision for Loan Losses. For the three months ended September 30, 2001 a
contribution of $760,000 was made to the provision for loan losses compared to a
contribution of $640,000 to the provision for loan losses for the three months
ended September 30, 2000. The increased contribution to the provision for loan
losses for the quarter ended September 30, 2001 reflects a precautionary
approach in response to declining economic conditions.
For the nine months ended September 30, 2001 a contribution of $1.6 million
was made to the provision for loan losses compared to a contribution of $1.4
million to the provision for loan losses for the nine months ended September 30,
2000. The increase in the provision for loan losses reflects our concern over
declining economic conditions, nationally and locally. Please see the section
below entitled "Analysis of Financial Condition -- Asset Quality Analysis; Loan
Loss Allowance."
Non-Interest Income. Total non-interest income was $2.1 million for the
third quarter of 2001, an increase of 143% over the $868,000 earned for the
third quarter of 2000. Service charges on deposit accounts increased 77% to
$713,000 for the third quarter of 2001 due to the growth in the deposit base
coupled with fees arising from a new product designed to automatically advance
funds to assist customers in the event of checking account overdrafts and an
increase in account maintenance fees. The Company reported a net gain on sale of
securities for the quarter ended September 30, 2001 of $513,000 compared to a
net loss on sale of securities of $483,000 during the comparable period of 2000.
Mortgage banking income increased to $227,000 in the third quarter of 2001
compared to a loss of $155,000 for the third quarter of 2000. The increase in
mortgage banking income resulted from a strong demand for mortgage loan services
for the quarter ended September 30, 2001 coupled with a loss associated with the
sale of jumbo mortgage loans during the quarter ended September 30, 2000. Income
from insurance and brokerage commissions increased 142% to $102,000 in the third
quarter of 2001 compared to $42,000 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 decreased 54% to $450,000 for the three months ended
September 30, 2001. The decrease reflects a net gain on sale of capital assets
associated with the sale of the Bank's Newton Main Office during the third
quarter of 2000.
Total non-interest income was $5.7 million for the nine months ended
September 30, 2001, an increase of 99% over the $2.9 million earned in the same
period of 2000. Service charges on deposit accounts increased 76% to $2.0
million for the nine months ended September 30, 2001 due to the growth in the
deposit base coupled with fees arising from a new product designed to
automatically advance funds to assist in the event of checking account
overdrafts as well as an increase in account maintenance fees. The Company
reported a net gain of sale of securities for the first nine months of 2001 of
$708,000 compared to a net loss of $483,000 during the comparable period of
2000. Mortgage banking income increased to $682,000 in the nine months ended
September 30, 2001 from $79,000 for the nine months ended September 30, 2000 due
to a strong demand for mortgage loan services coupled with a loss associated
with the sale of jumbo mortgage loans during the third quarter of 2000. Income
from insurance and brokerage commissions increased 132% to $267,000 for the
first nine months of 2001 compared to $115,000 for 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 was $1.7 million for the nine months ended
September 30, 2001 and 2000.
Non-Interest Expense. Total non-interest expense was $3.9 million in the
third quarter of 2001, an increase of 4% over the same period in 2000. Salary
and employee benefits decreased to $2.0 million for the three months ended
September 30, 2001 as compared to $2.3 million for the same period of 2000. This
decrease is primarily due to a reduction in expense associated with the accrual
of management and employee incentives.
11
Occupancy expense increased 19% due to increased overhead expenses
associated with branch renovations and the Company's new corporate headquarters.
Total non-interest expense was $12.4 million in the nine months ended
September 30, 2001, an increase of 7% over the same period in 2000. Salary and
employee benefits increased 2% for the nine months ended September 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 offset by a reduction in expense associated with the
accrual of management and employee incentives. Occupancy expense increased 20%
due to increased overhead expenses associated with new branches, existing branch
renovations and the Company's new corporate headquarters.
Income Taxes. The Company reported income taxes of $716,000 and $689,000
for the third quarters of 2001 and 2000, respectively. This represented
effective tax rates of 34% and 33% for the respective periods.
The Company reported income taxes of $2.1 million and $1.9 million for the
nine month periods ending September 30, 2001 and 2000, respectively. This
represented an effective tax rate of 33% for the respective periods.
ANALYSIS OF FINANCIAL CONDITION
Investment Securities. Available-for-sale securities amounted to $90.2
million at September 30, 2001 compared to $71.6 million at December 31, 2000.
This increase reflects the purchase of approximately $30.0 million in agency
securities funded by a $30.0 million Federal Home Loan Bank borrowing. Average
investment securities available for sale for the nine months ended September 30,
2001 amounted to $83.5 million compared to $66.2 million for the year ended
December 31, 2000.
Loans. At September 30, 2001, total loans amounted to $469.2 million
compared to $410.9 million at December 31, 2000, an increase of 14%. This loan
growth reflects a continuation of strong loan demand in the Bank's market area.
Average loans represented 83% of total earning assets for the nine months ended
September 30, 2001 compared to 84% for the year ended December 31, 2000.
Mortgage loans held for sale were $2.3 million at September 30, 2001, an
increase of 48% 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 Analysis; Loan Loss Allowances. The allowance for loan losses
reflects management's assessment and estimate of the risks associated with
extending credit and its evaluation of the quality of the loan portfolio. The
Bank periodically analyzes the commercial loan portfolio, in an effort to
establish asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks and loan
losses. In assessing the adequacy of the allowance, size, quality and risk of
loans in the portfolio are reviewed. Other factors considered are:
- the Bank's loan loss experience;
- the amount of past due and nonperforming loans;
- specific known risks;
- the status and amount of past due and nonperforming assets;
- underlying estimated values of collateral securing loans;
- current and anticipated economic conditions; and
- other factors which management believes affects the allowance for
potential credit losses.
12
An analysis of the credit quality of the commercial loan portfolio and the
adequacy of the allowance for loan losses is prepared by the Bank's credit
administration area and presented to the Bank's Executive and Loan Committee on
a regular basis. In addition, the Bank has engaged an outside loan review
consultant to perform and report, on an annual basis, an independent review of
the quality of the loan portfolio relative to the accurateness of the Bank's
loan grading system and process. The provision for loan losses is a charge to
earnings in the current period to enable the Bank to maintain the allowance at a
level that management estimates to be adequate.
The Bank's allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan losses and
the size of the allowance for loan losses compared to a group of peer banks
identified by the regulators. During their routine examinations of banks, the
FDIC and the North Carolina Commissioner of Banks may require a bank to make
additional provisions to its allowance for loan losses when, in the opinion of
the regulators, the allowance for loan losses and credit grades differ from the
regulators judgments.
While it is the Bank's policy to charge off in the current period loans for
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
Non-performing assets totaled $6.7 million at September 30, 2001 or 1.12%
of total assets, compared to $6.1 million at December 31, 2000 or 1.17% of total
assets. Non-accrual loans were $6.4 million at September 30, 2001, an increase
of $933,000 over non-accruals of $5.4 million at December 31, 2000. As a
percentage of total loans outstanding, non-accrual loans were 1.35% at September
30, 2001 compared to 1.32% at December 31, 2000. Loans ninety (90) days past due
and still accruing amounted to $216,000 and $545,000 at September 30, 2001 and
December 31, 2000, respectively. The allowance for loan losses at September 30,
2001 amounted to $5.9 million or 1.26% of total loans compared to $4.7 million
or 1.15% of total loans at December 31, 2000. The determination of the allowance
for loan losses rests upon management's judgment about a number of factors
affecting loan quality, assumptions about the economy and historical experience.
Judgment as to the adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular focus
on loans that are past due and other loans that management believes require
attention. Management believes that the allowance at September 30, 2001 was
adequate at that time to cover anticipated risk of losses in the loan portfolio;
however, judgment is based upon a number of assumptions about future events,
which management believes to be reasonable, but which may or may not be
realized. There is no assurance that charge-offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required, especially as a result of a
weaker economy generally, and the slowdown in the economy and uncertainties
created by the September 11, 2001 terrorist attacks and the war against
terrorism.
Deposits. Total deposits at September 30, 2001 were $497.8 million, an
increase of 11% over deposits of $450.1 million at December 31, 2000.
Certificates of deposit in amounts of $100,000 or more totaled $170.5 million at
September 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 $52.2 million at
September 30, 2001 compared to $21.4 million at December 31, 2000. This
increase reflects a $30.0 million borrowing, which allowed the Bank to purchase
approximately $30.0 million 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 nine months ended September 30,
2001 was $38.9 million compared to $15.8 million for the year ended December 31,
2000. At September 30, 2001, Federal Home Loan Bank borrowings with maturities
exceeding one year amounted to $52.2 million. The Company had no federal funds
purchased as of September 30, 2001 or December 31, 2000.
Capital Structure. Shareholders' equity at September 30, 2001 was $46.9
million compared to $43.0 million at December 31, 2000. In addition, at
September 30, 2001 and December 31, 2000, unrealized gains and
13
losses, net of taxes, in the available-for-sale securities portfolio amounted to
a gain of $699,000 and a gain of $4,000, respectively. Annualized return on
average equity for the nine months ended September 30, 2001 was 11.62% compared
to 12.55% for the year ended December 31, 2000. Total cash dividends paid during
the nine months ended September 30, 2001 amounted to $966,000 an increase of 3%
compared to total cash dividends of $936,000 paid for the first nine 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 8.94% and 10.11% at
September 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 10.08% and 11.22% at September 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 8.14% and 9.10% at September 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 September 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 September 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 $52.2 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 25.35% at September 30, 2001 and 27.03% at December 31, 2000.
14
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 September 30, 2001 from that presented in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of 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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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
16
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
The Company filed a Form 8-K on September 21, 2001, announcing the approval
of new titles and definitions for the Bank's most senior executive officers
on September 18, 2001.
17
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.
October 29, 2001 By: /s/ Tony W. Wolfe
-------------------- -----------------------------------------
Date Tony W. Wolfe
President and Chief Executive Officer
(Principal Executive Officer)
October 29, 2001 By: /s/ George S. Earp
-------------------- -----------------------------------------
Date George S. Earp
First Vice President - Finance
(Principal Accounting Officer)
18