__________________________
PEOPLES BANCORP
OF NORTH CAROLINA, INC.
__________________________
Notice of 2002 Annual Meeting,
Proxy Statement and
Annual Report
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PROXY STATEMENT
TABLE OF CONTENTS
Page
----
Notice of 2002 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 . . . . . . . . . . . . . . . . . . 20
Compensation Committee Interlocks and Insider Participation. . . . . 20
Report of Audit and Examining Committee. . . . . . . . . . . . . . . 20
Performance Graph. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proposal 2 - Ratification of Selection of Independent Auditor. . . . 22
Date for Receipt of Shareholder Proposals. . . . . . . . . . . . . . 22
Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Appendix A: Annual Report. . . . . . . . . . . . . . . . . . . . . . . .
General Description of the Business. . . . . . . . . . . . . . . . . A-1
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . A-2
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . A-3
Quantitative and Qualitative Disclosures About Market Risk . . . . . A-16
Market For the Company's Common Equity and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . A-17
Directors and Officers of the Company. . . . . . . . . . . . . . . . A-18
Report of Independent Certified Public Accountants . . . . . . . . . A-19
Consolidated Balance Sheets - December 31, 2001 and 2000 . . . . . . A-20
Consolidated Statements of Earnings - For the Years Ended
December 31, 2001, 2000 and 1999. . . . . . . . . . . . . . . . A-21
Consolidated Statements of Changes in Shareholders' Equity -
For the Years Ended December 31, 2001, 2000 and 1999. . . . . . A-22
Consolidated Statements of Comprehensive Income - For the
Years Ended December 31, 2001, 2000 and 1999. . . . . . . . . . A-23
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2001, 2000 and 1999. . . . . . . . . . . . . . . . A-24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . A-26
PEOPLES BANCORP OF NORTH CAROLINA, INC.
POST OFFICE BOX 467
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658-0467
(828) 464-5620
NOTICE OF 2002 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 2, 2002
NOTICE IS HEREBY GIVEN that the 2002 Annual Meeting of Shareholders (the
"Meeting") of Peoples Bancorp of North Carolina, Inc. (the "Company") will be
held on Thursday, May 2, 2002, 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 three persons who will serve as directors of the Company for
a three-year term expiring in 2005, 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, 2002; 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 15, 2002 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 Wolfe
Tony W. Wolfe
President and Chief Executive Officer
Newton, North Carolina
April 3, 2002
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
2002 ANNUAL MEETING OF SHAREHOLDERS
MAY 2, 2002
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 2, 2002, 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, 2002.
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 2002 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, 2002. 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 15, 2002 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 3,145,380.
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 2005 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 335,312(3) 10.66%
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 3,145,380 shares of Common Stock outstanding as of
the Record Date.
3 Carolina Glove Company, Inc. has acquired 56,378 shares of Common Stock.
These shares are included in the calculation of Ms. Abernethy's total
beneficial ownership interest. 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.
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 2.03%
Post Office Box 327
Newton, NC 28658
Robert C. Abernethy 109,029(3) 3.45%
Post Office Box 366
Newton, NC 28658
Joseph F. Beaman, Jr. 5,384(4) *
Post Office Box 467
Newton, NC 28658
William D. Cable 2,640(5) *
Post Office Box 467
Newton, NC 28658
Bruce R. Eckard 19,700 *
Post Office Box 563
Conover, NC 28613
John H. Elmore, Jr. 24,002 *
Post Office Box 445
Catawba, NC 28609
Gary E. Matthews 1,479 *
210 First Avenue South
Conover, NC 28613
Charles F. Murray 56,773(6) 1.80%
Post Office Box 1118
Claremont, NC 28610
Larry E. Robinson 21,472(7) *
Post Office Box 723
Newton, NC 28658
Lance A. Sellers 2,656(8) *
Post Office Box 467
Newton, NC 28658
Fred L. Sherrill, Jr. 14,058(9) *
Post Office Box 816
Conover, NC 28613
Dan Ray Timmerman, Sr. 24,193 *
Post Office Box 1148
Conover, NC 28613
Clifton A. Wike 3,171(10) *
Post Office Box 467
Newton, NC 28658
Tony W. Wolfe 8,650(11) *
Post Office Box 467
Newton, NC 28658
3
AMOUNT AND
NATURE OF PERCENTAGE
BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP(1) CLASS(2)
- ---------------- ------------ ---------
Benjamin I. Zachary 5,224 *
Post Office Box 277
Taylorsville, NC 28681
All current directors and nominees and 362,723 (12, 13) 11.48%
executive officers as a group (16 people)
<FN>
* Does not exceed one percent of the Common Stock outstanding.
______________________________________________
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 3,145,380 shares of Common Stock outstanding as of
the Record Date and the number of stock options exercisable within 60 days
with respect to the designated recipient(s).
3 Includes 2,459 shares of Common Stock owned by Mr. Abernethy's spouse, for
which Mr. Abernethy disclaims beneficial ownership.
4 Includes 3,639 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 1,209 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 2,670 shares of Common Stock owned by Mr. Robinson's spouse, for
which Mr. Robinson disclaims beneficial ownership.
8 Includes 2,556 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 1,688 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 6,203 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 15,295 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.
13 This total includes shares beneficially owned by Mr. Wike. Due to
restructuring of the Company's management team in October 2001, Mr. Wike is
no longer classified as an executive officer.
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.
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, except as disclosed in this paragraph, that
during the fiscal year ended December 31, 2001, its executive officers and
directors and greater than ten percent beneficial owners complied with all
applicable Section 16(a) filing requirements. On April 23, 2001, Ms. Christine
S. Abernerthy made a one time purchase of 2000 shares of common stock that was
not timely reported on Form 4 but has since been reported to the Securities and
Exchange Commission. On June 25, 2001, and July 5, 2001, Mr. John H. Elmore,
Jr., sold 1,650 shares of common stock that was not timely reported on Form 4.
These sales have since been reported to the Securities and Exchange Commission.
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 three persons named below for
election as directors to serve for a three-year term to expire at the 2005
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 three nominees listed below as directors for the term specified, unless
authority to vote is withheld or such proxies are duly revoked. All of the
nominees for election are currently members of the Board of Directors whose
terms expire in 2002. 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 50
days nor more than 90 days prior to the meeting at which such nominations will
be made; provided, however, if less than 60 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 tenth 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, 2001 DURING LAST FIVE YEARS SINCE
- ---- ----------------- ---------------------- -----
John H. Elmore, Jr. 59 Chairman of the Board, Chief Executive 1974
Officer and Treasurer, Elmore Construction
Company, Inc.
Charles F. Murray 58 President, Murray's Hatchery, Inc. 1990
Fred L. Sherrill, Jr. 67 Retired (furniture manufacturer executive) 1989
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE ABOVE-LISTED
---
NOMINEES FOR ELECTION AS DIRECTORS. THE THREE 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, 2001 DURING LAST FIVE YEARS SINCE EXPIRES
---- ----------------- ---------------------- ----- -------
Robert C. Abernethy 51 President, Secretary and Treasurer, 1976 2003
Carolina Glove Company, Inc. (glove
manufacturer); Secretary and Assistant
Treasurer, Midstate Contractors, Inc.
(paving company)
James S. Abernethy 47 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 56 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)
Bruce R. Eckard 54 President, Eckard Vending Company, Inc. 1994 2004
(vending machine servicer)
Gary E. Matthews 46 President and Director, Matthews 2001 2004
Construction Company, Inc.
Dan Ray Timmerman, Sr. 54 President, Timmerman Manufacturing, 1995 2004
Inc. (wrought iron furniture manufacturer)
Benjamin I. Zachary 45 General Manager, Treasurer, 1995 2004
Secretary and member of the Board
of Directors, Alexander Railroad
Company
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
7 times during the fiscal year ended December 31, 2001. During the year ended
December 31, 2001, 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 of the Company has one standing committee - the
Auditing and Examining Committee. The Audit and Examining Committee consists of
Directors R. Abernethy, G. 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 6 times during the fiscal year ended December 31,
2001.
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 6 times during the fiscal year
ended December 31, 2001.
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 10 times
during the fiscal year ended December 31, 2001.
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 10 times during the fiscal year
ended December 31, 2001.
7
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. Directors
receive a fee of $500 for each Bank board of directors meeting attended. An
additional fee of $200 is paid to committee members for each committee meeting
attended, with the exception of the Executive and Loan Committee for which a fee
of $300 is paid to committee members for each meeting attended. In addition to
these meeting fees, each director also received an annual retainer of $7,200.
A service award was made under the Service Recognition Plan for directors,
officers and employees to one member of the Board of Directors in 2001. Mr. R.
Abernathy received Common Stock having a value of $2,992.00 and $776.70 in cash
for twenty-five years of service.
Directors' Stock Benefits Plan. 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. All directors other than
Mr. G. Matthews were awarded book value shares on September 28, 1999. Mr. G.
Matthews was not a director at that time. The book value of the Common Stock on
September 28, 1999, was $11.45 (adjusted to reflect a 10% stock dividend on
April 24, 2000). The book value shares then awarded vest 20% annually, with the
first 20% vesting on September 28, 2000, and the final 20% vesting on September
28, 2004. Mr. G. Matthews was awarded 5,365 book value shares upon his election
to the Board of Directors on May 3, 2001. The book value of the Common Stock on
May 3, 2001, was $13.95. Mr. G. Matthew's book value shares vest at a rate of
20% annually with the first 20% vesting on May 3, 2002, and the final 20%
vesting on May 3, 2006. See "-- Management Compensation - Stock Benefits Plan"
for a description of the plan.
Directors' Deferred Compensation Plan. In January 2002, the Bank
established a non-qualified deferred compensation plan for all of its directors.
The Bank's directors are also directors of the Company. Under this plan, each
director may defer all or a portion of his fees to the plan each year. The
director may elect to invest the deferred compensation in a restricted list of
eleven investment funds. The Bank may make matching contributions to the plan
for the benefit of the director from time to time at the discretion of the Bank.
Directors are fully vested in all amounts they contribute to the plan and in any
amounts contributed by the Bank.
Benefits under the plan are payable in the event of the director's death,
resignation, removal failure to be re-elected, retirement or in cases of
hardship. Directors may elect to receive deferred compensation payments in one
lump sum or in installments.
Effective December 6, 2001, the Bank established a Rabbi Trust to hold the
directors' accrued benefits under the plan. The Directors' Deferred
Compensation Plan was made effective January 1, 2002.
Directors' Supplemental Retirement Plan. Effective January 1, 2002, the
Bank implemented a non-qualified supplemental retirement benefits plan for all
its directors. The plan is designed to provide a retirement benefit to the
directors while at the same time minimizing the financial impact on the Bank's
earnings. The plan provides retirement benefits based on an index formula.
This formula consists of the earnings on a specific life insurance policy,
reduced by an amount equal to the Bank's opportunity cost. At retirement, the
Bank pays the accumulated excess earnings to the director over a specified
number of years. During retirement, the Bank pays the earnings in excess of the
opportunity cost to the director annually. These payments continue for fifteen
years following the director's retirement. The Bank has purchased life
insurance policies on each insurable director that are actuarially designed to
offset the annual expense associated with the indexed formula benefit. The Bank
is the sole owner of all the policies.
8
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 2001 DURING LAST FIVE YEARS BANK SINCE
- --------------------- ------------ ---------------------------------------------- ---------------
Tony W. Wolfe 55 President and Chief Executive Officer of the 1990
Company and the Bank
Joseph F. Beaman, Jr. 52 Executive Vice President and Corporate 1977
Secretary of the Company; Executive Vice
President, Chief Administrative Officer and
Secretary of the Bank; Prior to 2001, Chief
Financial Officer of the Company and the
Bank
William D. Cable 33 Executive Vice President and Assistant 1995
Corporate Treasurer of the Company;
Executive Vice President and Chief
Operations Officer of the Bank. Bank
Senior Vice President - Information Services
from April 1998 to 2001. Vice President -
Internal Auditor of the Bank from January
1997 to April 1998
Lance A. Sellers 39 Executive Vice President and Assistant 1998
Corporate Secretary of the Company;
Executive Vice President and Chief Banking
Officer of the Bank; Prior to 2001, Bank
Executive Vice President - Credit
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
A. Joseph Lampron 47 Executive Vice President, Chief Financial 2001
Officer and Corporate Treasurer of the
Company; Executive Vice President and
Chief Financial Officer of the Bank. Prior to
December 2001, Vice President/Senior
Change Manager at a large North Carolina
bank. Prior to February 1997, consultant.
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 table on the following page shows, for the fiscal years ended December
31, 2001, 2000 and 1999, 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.
9
ALL OTHER
LONG TERM COMPENSATION COMPENSATION
ANNUAL COMPENSATION AWARDS (2,3,4,5,6)
--------------------------------------- ------------------------- -------------
SECURITIES
UNDERLYING
OPTIONS
/STOCK
APPRECIATION
RESTRICTED RIGHTS
NAME AND OTHER ANNUAL STOCK ("SARS")
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS (IN SHARES)
- ---------------------------------------- ---- -------- ------- -------------- ---------- -------------
Tony W. Wolfe 2001 $205,260 $ 0 $ - - - - 9,393/ 0(7) $ 12,327
President and Chief Executive Officer of 2000 185,866 60,011 - - - - 17,179/0(8) 9,948
the Company and the Bank 1999 162,818 15,193 - - - - 0/0( 9) 9,579
Joseph F. Beaman, Jr. 2001 $144,465 $ 0 $ - - - - 4,981/0(7) $ 9,219
Executive Vice President and Corporate 2000 137,460 39,787 - - - - 10,059/0(8) 8,716
Secretary of the Company; Executive 1999 115,647 20,063 - - - - 0/0 (9) 8,088
Vice President, Chief Administrative
Officer and Secretary of the Bank
Lance A. Sellers 2001 $130,595 $ 0 $ - - - - 4,821/0(7) $ 6,601
Executive Vice President and Assistant 2000 115,658 33,355 - - - - 7,132/0(8) 5,829
Corporate Secretary of the Company; 1999 112,068 16,610 - - - - 0/0(9) 175
Executive Vice President and Chief
Banking Officer of the Bank
Clifton A. Wike 2001 $105,263 $ 0 $ - - - - 2,000/0(7) $ 6,631
Senior Vice President, Senior Lender of 2000 98,593 23,134 - - - - 4,655/0(8) 5,227
the Bank 1999 95,200 8,055 - - - - 0/0(9) 5,256
William D. Cable 2001 $103,131 $ 0 $ - - - - 3,519/0(7) $ 7,207
Executive Vice President and Assistant 2000 91,447 19,482 - - - - 3,433/0(8) 4,574
Corporate Treasurer of the Company; 1999 82,115 10,732 - - - - 0/0(9) 4,113
Executive Vice President and Chief
Operations Officer of the Bank
- -----------------------------------------
Footnotes on the following page
10
<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 2001: $10,500 under the 401(k) plan and a
$1,827 premium paid for group term life insurance in excess of $50,000; 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.
3 For Mr. Beaman, includes for 2001: $8,568 under the 401(k) plan and a $651
premium paid for group term life insurance in excess of $50,000; 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.
4 For Mr. Sellers, includes for 2001: $6,379 under the 401(k) plan and a $222
premium paid for group term life insurance in excess of $50,000; 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.
5 For Mr. Wike, includes for 2001: $6,195 under the 401(k) plan and a $436
premium paid for group term life insurance in excess of $50,000; 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.
6 For Mr. Cable, includes for 2001: $7,061 under the 401(k) plan and a $146
premium paid for group term life insurance in excess of $50,000; 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.
7 Includes 9,393; 4,981; 4,821; 2,000; and 3,519 shares subject to option
granted on October 30, 2001, 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 October 30, 2011, shares of
Common Stock in exchange for an exercise price of $15.94 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 will vest on October 30, 2002, one-third
will vest on October 30, 2003, and the final third will vest on October 30,
2004. All options become 100% vested upon death, disability or a change in
control of the Bank.
8 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, 20% vested on September 28, 2001, 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 vested on September 25,
2001, one-third will vest on September 25, 2002 and the final third will
vest on September 25, 2003. All options become 100% vested upon death,
disability or a change in control of the Bank.
9 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 8.
11
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 Administrative Officer and Corporate Secretary; Lance A.
Sellers, Executive Vice President, Chief Banking Officer and Assistant Corporate
Secretary; A. Joseph Lampron, Executive Vice President, Chief Financial Officer
and Corporate Treasurer; William D. Cable, Executive Vice President, Chief
Operations Officer and Assistant Corporate Treasurer; and Clifton A. Wike,
Senior Vice President, Senior Lender 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 thirteen middle management officers have been granted
employment agreements for two-year terms. Those employment agreements contain
provisions similar to those discussed above.
12
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
Bank's board of directors (the "Committee"). Subject to the terms of the
Omnibus Plan, the Committee and the board of directors have authority to
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. As of December 31, 2001, Rights representing 321,860 shares
of Common Stock (adjusted to reflect the April 24, 2000 10% stock dividend) were
eligible to 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.
13
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 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.
14
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.
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.
15
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.
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.
16
Grants and Awards Made During the Fiscal Year Ended December 31, 2001. On
October 30, 2001, the Board of Directors awarded options to purchase 57,964
shares of Common Stock to 43 officers and employees of the Bank at an exercise
price of $15.94 per share. On December 18, 2001, the Board of Directors awarded
options to purchase 4,138 shares of Common Stock to one officer at an exercise
price of $14.70 per share.
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 9,393/0(1) 15.13% $15.94(2) 10/30/11 $ 94,146.12 $ 238,584.74
Joseph F. Beaman, Jr. 4,981/0(1) 8.02% $15.94(2) 10/30/11 $ 49,924.60 $ 126,518.75
Lance A. Sellers 4,821/0(1) 7.76% $15.94(2) 10/30/11 $ 38,467.24 $ 97,483.55
Clifton A. Wike 2,000/0(1) 3.22% $15.94(2) 10/30/11 $ 15,958.20 $ 40,441.21
William D. Cable 3,519/0(1) 5.67% $15.94(2) 10/30/11 $ 28,078.45 $ 71,156.32
<FN>
- -----------------
1 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 October 30, 2011, shares of Common Stock in exchange for an exercise
price of $15.94 per share, which was the fair market per share value of the
Common Stock on the date of grant. Of these options granted to Messrs.
Wolfe, Beaman, Sellers, Wike and Cable, one-third of the options will vest
on October 30, 2002, one-third will vest on October 30, 2003, and the final
third will vest on October 30, 2004. All options become 100% vested upon
death, disability or a change in control of the Bank.
2 Represents the closing market price per share of the underlying securities
on the date of grant (October 30, 2001).
No options were exercised by Mr. Wolfe, Mr. Beaman, Mr. Sellers, Mr. Wike,
or Mr. Cable during the fiscal year ended December 31, 2001.
17
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
VALUE UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED REALIZED OPTIONS/SARS AT OPTIONS/SARS AT
NAME ON EXERCISE (#) ($) FISCAL YEAR END(1) FISCAL YEAR END(2)
---- --------------- --------- -------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------ --------------
Tony W. Wolfe 0 $ 0 6,203/0 20,369/0 $5,553.30/$0 $ 16,661.58/$0
Joseph F. Beaman, Jr. 0 $ 0 3,639/0 11,401/0 $3,194.45/$0 $ 9,584.31/$0
Lance A. Sellers 0 $ 0 2,556/0 9,397/0 $2,462.47/$0 $ 7,388.15/$0
Clifton A. Wike 0 $ 0 1,688/0 4,967/0 $1,471.17/$0 $ 4,413.94/$0
William D. Cable 0 $ 0 1,209/0 5,743/0 $1,360.34/$0 $ 4,081.44/$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. Pursuant to an amendment to the Stock Option Grant
Agreements dated September 25, 2000 these options 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. One-third of
these options vested on September 25, 2001, one-third will vest on
September 25, 2002 and one-third will vest on September 25, 2003. Options
to purchase 24,714 shares of Common Stock were granted to the named persons
as of October 30, 2001. One-third will vest on October 30, 2002, one-third
will vest on October 30, 2003, and one-third will vest on October 30, 2004.
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. The exercise price of the stock options granted on October 30, 2001
is $15.94. On December 31, 2001, the closing market price for the Common
Stock as reported on the Nasdaq National Market was $14.35.
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 for all eligible employees. As the
result of overfunding in prior years, the Bank made no contribution to the
profit sharing plan for the year ended December 31, 2001. 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 2001 contribution
to the 401(k) Plan pursuant to this formula was approximately $318,000. 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. As of December 31, 2001, 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.
18
DEFERRED COMPENSATION PLAN
In January 2002, the Bank established a non-qualified deferred compensation
plan for directors and certain officers. Eligible officers selected by the
Bank's board of directors may elect to contribute a percentage of their
compensation to the plan. The Bank may make matching or other contributions to
the plan as well, in amounts determined at the discretion of the Bank.
Participants are fully vested in all amounts contributed to the plan by them or
on their behalf.
Benefits under the plan are payable in the event of the participant's
retirement, death, termination, or as a result of hardship. Benefit payments
may be made in a lump sum or in installments, as selected by the participant.
Effective December 6, 2001, the Bank established a rabbi trust to hold the
accrued benefits of the participants under the plan.
SUPPLEMENTAL RETIREMENT PLAN
Effective January 1, 2002, the Bank implemented a non-qualified
supplemental retirement benefits plan for certain officers. The plan is
designed to provide a retirement benefit to the officers while at the same time
minimizing the financial impact on the Bank's earnings. The plan provides
retirement benefits based on an index formula. The index formula consists of
the earnings on a specific life insurance policy, reduced by an amount equal to
the Bank's opportunity cost. At retirement, the Bank pays the accumulated
excess earnings to the officer over a specified number of years. During
retirement, the Bank pays the earnings in excess of the opportunity cost to the
officer annually. These payments continue for a period between ten years and
the life of the officer. The Bank has purchased life insurance policies on the
participating officers that are actuarially designed to offset the annual
expenses associated with the index formula benefit. The Bank is the sole owner
of all of the policies.
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 2001. All outstanding loans, extensions
of credit or overdrafts, endorsements and guarantees outstanding at any time
during 2001 (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.
B.E. Matthews, a former director and the father of Gary E. Matthews, a
current director, was the majority shareholder of a corporate borrower of the
Bank. In December 2001, the corporate borrower was liquidated and defaulted
upon its loan. The Bank charged off the remaining loan balance after
liquidation of $351,197.00.
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 2002
at an approximate cost of $142,267 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.
19
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 Administrative Officer and Corporate Secretary; Lance A.
Sellers, Executive Vice President, Chief Banking Officer and Assistant Corporate
Secretary; A. Joseph Lampron, Executive Vice President, Chief Financial Officer
and Corporate Treasurer; William D. Cable, Executive Vice President, Chief
Operations Officer and Assistant Corporate Treasurer; and Clifton A. Wike,
Senior Vice President, Senior Lender, during the 2001 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 Larry E. Robinson
Bruce R. Eckard Fred L. Sherrill, Jr.
John H. Elmore, Jr. Dan Ray Timmerman, Sr.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
As previously stated, the Company does not have a Compensation Committee.
However, the Bank's board of directors has a Compensation Committee which is
composed of Directors R. Abernethy, Eckard, Elmore, Robinson, Sherrill, and
Timmerman. 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 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, 2001.
Robert C. Abernethy Larry E. Robinson
Gary E. Matthews Fred L. Sherrill, Jr.
Charles F. Murray Benjamin I. Zachary
20
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, 2001.
COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS
Performance Report for
Peoples Bancorp of North Carolina, Inc.
PERIOD ENDING
----------------------------------------------------------
INDEX 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
- ------------------------------------------------------------------------------------
Peoples Bancorp Inc. 100.00 160.91 143.73 142.60 111.70 157.66
NASDAQ - Total US* 100.00 122.48 172.68 320.89 193.01 153.15
SNL Southeast Bank Index 100.00 151.59 161.38 127 127.52 158.86
<FN>
*Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 2002. Used with permission. All rights
reserved. crsp.com.
SNL FINANCIAL LC (434) 977-1600
(C) 2002
21
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITOR
Porter Keadle Moore, LLP, of Atlanta, Georgia ("PKM"), has been selected as
the Company's and the Bank's independent auditor for the year ending December
31, 2002. 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, 2002.
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, 2001
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
$97,383.00.
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, 2001.
ALL OTHER FEES
In addition to the fees outlined above, PKM billed fees in the amount of
$41,902.00 for additional services rendered during the fiscal year ended
December 31, 2001. 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 2003 Annual Meeting of Shareholders of
the Company will be held on May 1, 2003. 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, 2002, 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 2003 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, 2003, of his or her proposal. If the Secretary of
the Company is not notified of the shareholder's proposal by February 17, 2003,
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
2003 Annual Meeting.
22
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, 2001,
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: A. JOSEPH
LAMPRON.
By Order of the Board of Directors,
/s/ Tony Wolfe
Tony W. Wolfe
President and Chief Executive Officer
Newton, North Carolina
April 3, 2002
23
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 Company has no
operations and conducts no business of its own other than owning the Bank.
Accordingly, the discussion of the business which follows concerns the business
conducted by the Bank, unless otherwise indicated.
The Bank, founded in 1912, is a state-chartered commercial bank serving the
citizens and business interests of the Catawba Valley and surrounding
communities through 13 offices located in Lincolnton, Newton, Denver, Triangle,
Catawba, Conover, Maiden, Claremont, Hiddenite, and Hickory, North Carolina. At
December 31, 2001, the Company had total assets of $619.5 million, net loans of
$484.5 million, deposits of $490.2 million, investment securities of $84.3
million, and shareholders' equity of $45.4 million.
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. 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.
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 Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Commissioner of Banks (the "Commissioner").
The Bank is a subsidiary of the Company. The Bank has two subsidiaries,
Peoples Investment Services, Inc. and Real Estate Advisory 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. Real Estate
Advisory Services, Inc., provides real estate appraisal and real estate
brokerage services.
In December, 2001 the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust I ("PEBK Trust"), which issued $14 million of
guaranteed preferred beneficial interests in the Company's junior subordinated
deferrable interest debentures that qualify as Tier I capital under Federal
Reserve Board guidelines. All of the common securities of PEBK Trust are owned
by the Company.
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 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-1
SELECTED
FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
2001 2000 1999 1998 1997
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Interest income $ 41,898 40,859 32,302 29,215 23,783
Interest expense 23,027 19,432 14,790 14,540 11,179
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
Net interest income 18,871 21,427 17,512 14,675 12,604
Provision for loan losses 3,545 1,879 425 445 696
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 15,326 19,548 17,087 14,230 11,908
Non-interest income 8,263 3,915 3,380 3,646 2,060
Non-interest expense 16,752 15,509 13,832 12,020 10,413
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
Income before taxes 6,837 7,954 6,635 5,856 3,555
Income taxes 2,262 2,576 2,093 1,847 1,149
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
Net income $ 4,575 5,378 4,542 4,009 2,406
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
SELECTED YEAR-END BALANCES
Assets $ 619,505 519,002 432,435 402,273 326,853
Available for sale securities 84,286 71,565 62,498 63,228 53,307
Loans 489,856 407,790 336,959 306,748 238,449
Interest-earning assets 586,496 490,449 411,734 383,270 308,852
Deposits 490,223 450,073 376,634 350,067 275,393
Interest-bearing liabilities 515,989 420,594 339,243 315,387 258,685
Shareholders' equity $ 45,401 43,039 37,998 35,924 24,930
Shares outstanding* 3,218,714 3,218,714 3,218,950 3,219,150 2,808,300
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
SELECTED AVERAGE BALANCES
Assets $ 575,142 469,536 417,387 369,864 295,879
Available for sale securities 84,549 66,218 60,642 59,824 57,508
Loans 454,371 374,226 324,651 271,819 215,789
Interest-earning assets 545,945 447,645 396,606 351,730 281,215
Deposits 481,289 408,210 363,637 321,371 252,998
Interest-bearing liabilities 472,435 373,167 326,164 293,631 233,901
Shareholders' equity $ 47,432 42,852 39,348 33,303 24,117
Shares outstanding* 3,218,714 3,218,714 3,218,950 3,058,160 2,808,300
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
PROFITABILITY RATIOS
Return on average total assets 0.80% 1.15% 1.09% 1.08% 0.81%
Return on average shareholders' equity 9.65% 12.55% 11.54% 12.04% 9.98%
Dividend payout ratio 28.14% 23.39% 23.84% 22.61% 33.18%
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loan to deposit 94.41% 91.67% 89.28% 84.58% 85.29%
Shareholders' equity to total assets 8.25% 9.13% 9.43% 9.00% 8.15%
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK*
Net income $ 1.42 1.67 1.41 1.31 0.86
Cash dividends $ 0.40 0.39 0.34 0.28 0.28
Book value $ 14.11 13.37 11.81 11.16 8.88
- ---------------------------------------------------- --------------- ---------- ---------- ---------- ----------
<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-2
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, 2001, 2000 and 1999. 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 $4.6 million in 2001, or $1.42 basic and
diluted net income per share, a 15% decrease as compared to $5.4 million, or
$1.67 basic and diluted net income per share, for 2000. Net income for 2000
represented an increase of 18% as compared to 1999 net income of $4.5 million.
The decline in net income in 2001 is attributable to a decrease in net interest
income, coupled with charge-offs of certain non-performing loans. The increase
in net income in 2000 compared to 1999 resulted from increased net interest
income combined with an increase in non-interest income and partially offset by
growth in non-interest expense.
Return on average assets in 2001 was 0.80%, compared to 1.15% in 2000 and
1.09% in 1999. Return on average shareholders' equity was 9.65% in 2001 compared
to 12.55% in 2000 and 11.54% in 1999.
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 $19.3 million in
2001, a decrease of 12% or $2.6 million from the comparable figure in 2000. The
increase in net interest income on a tax equivalent basis in 2000 over 1999 was
$3.9 million or 22%. The interest rate spread, which represents the rate earned
on interest earning assets less the rate paid on interest-bearing liabilities,
decreased to 2.89% in 2001 from 4.03% in 2000, following an increase from the
1999 net interest spread of 3.74%. The net yield on earning assets decreased to
3.54% in 2001 from 4.90% in 2000, following an increase from the 1999 net
interest margin of 4.54%.
A-3
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,
2001, 2000 and 1999. 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. Yield
information does not give effect to changes in fair value that are reflected as
a component of shareholders' equity. 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, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------------------------
(Dollars in Thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ----------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans: Net of unearned income $454,371 $ 36,512 8.04% $374,226 $ 36,424 9.73% $324,651 $ 28,375 8.74%
Investments - taxable 61,050 3,919 6.42% 44,320 2,994 6.76% 39,122 2,348 6.00%
Investments - nontaxable 20,080 1,381 6.88% 21,898 1,497 6.84% 21,520 1,475 6.86%
Federal funds sold 3,776 127 3.36% 4,593 282 6.14% 6,780 339 5.00%
Other 6,668 428 6.42% 2,608 171 6.56% 4,533 266 5.87%
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 545,945 42,367 7.76% 447,645 41,368 9.24% 396,606 32,803 8.27%
Cash and due from banks 12,273 11,538 10,667
Other assets 21,703 14,199 14,192
Allowance for loan losses (5,598) (4,281) (4,079)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $574,323 $469,101 $417,386
==================================================================================================================================
Interest bearing liabilities:
Deposits:
NOW accounts $ 38,584 $ 413 1.07% $ 32,866 $ 456 1.39% $ 31,003 $ 429 1.38%
Regular savings accounts 22,670 178 0.78% 24,982 472 1.89% 26,258 490 1.87%
Insured money market accounts 65,846 2,373 3.60% 55,982 2,832 5.06% 54,757 2,435 4.45%
Certificates of deposit $100,000 or more 156,034 9,669 6.20% 108,130 6,729 6.22% 83,845 4,475 5.34%
Other time deposits 143,781 8,158 5.67% 133,419 7,838 5.87% 115,786 6,178 5.34%
FHLB borrowings 42,533 2,118 4.98% 15,806 974 6.16% 13,532 736 5.44%
Demand notes payable to U.S. Treasury 897 33 3.64% 852 55 6.46% 899 41 4.56%
Other 2,090 84 4.02% 1,130 76 6.73% 83 5 5.95%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 472,435 23,026 4.87% 373,167 19,432 5.21% 326,163 14,789 4.53%
Demand deposits 54,374 52,831 51,988
Other liabilities 3,486 3,268 2,166
Shareholders' equity 46,093 42,208 39,348
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $576,388 $471,474 $419,665
==================================================================================================================================
Net interest spread $ 19,341 2.89% $ 21,936 4.03% $ 18,014 3.74%
==================================================================================================================================
Net yield on earning assets 3.54% 4.90% 4.54%
==================================================================================================================================
Taxable equivalent adjustment
Investment securities 470 509 502
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 18,871 $ 21,427 $ 17,512
==================================================================================================================================
A-4
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, 2001 DECEMBER 31, 2000
------------------------------------------- -----------------------------------------
CHANGES IN CHANGES IN TOTAL CHANGES IN CHANGES IN TOTAL
IN AVERAGE AVERAGE INCREASE IN AVERAGE AVERAGE INCREASE
(Dollars in Thousands) VOLUME RATES (DECREASE) VOLUME RATES (DECREASE)
- ------------------------------------------------------------------------------------ -----------------------------------------
Interest Income:
Loans: Net of unearned income $ 7,120 ($7,032) $ 88 $ 4,579 $ 3,470 $ 8,049
Investments - taxable 1,103 (178) 925 331 315 646
Investments - nontaxable (125) 9 (116) 26 (4) 22
Federal funds sold (39) (116) (155) (122) 65 (57)
Other 277 (20) 257 (108) 13 (95)
----------- ------------- --------------- ----------- -------------- ------------
Total interest income $ 8,336 ($7,337) $ 999 $ 4,706 $ 3,859 $ 8,565
Interest bearing liabilities:
Deposits:
NOW accounts 70 (113) (43) 26 1 27
Regular savings accounts (31) (263) (294) (24) 6 (18)
Insured money market accounts 427 (886) (459) 58 338 396
Certificates of deposit $100,000 or more 2,975 (35) 2,940 1,404 850 2,254
Other time deposits 598 (278) 320 988 672 1,660
FHLB Borrowings 1,489 (345) 1,144 132 106 238
Demand notes payable to U.S. Treasury 2 (25) (23) (3) 17 14
Other 54 (45) 9 66 6 72
----------- ------------- --------------- ----------- -------------- ------------
Total interest expense $ 5,584 ($1,990) $ 3,594 $ 2,647 $ 1,996 $ 4,642
----------- ------------- --------------- ----------- -------------- ------------
Net interest income $ 2,752 ($5,347) ($2,595) $ 2,059 $ 1,863 $ 3,923
The decrease in net interest income in 2001 was primarily attributable to
declining interest rates during 2001. The yield on earning assets decreased to
7.76% in 2001 from 9.24% in 2000. This decrease reflects a decrease in the
Company's average prime commercial lending rate in 2001, when compared to 2000.
The average balance of earning assets increased by $98.3 million, to $546.0
million in 2001 from $447.6 million in 2000. The increase in average loans
comprised $80.1 million of this increase. Average investments increased $14.9
million or 23% to $81.1 million in 2001 as compared to $66.2 million in 2000.
Average interest-bearing liabilities increased by $99.2 million, to $472.4
million in 2001 from $373.2 million in 2000. This growth in average
interest-bearing liabilities is a direct result of the increase in average
interest-bearing deposits, which increased by $71.5 million, to $426.9 million
in 2001 from $355.4 million in 2000 and an increase in Federal Home Loan Bank
(FHLB) borrowings of $26.7 million to $42.5 million in 2001 from $15.8 million
in 2000. The increase in average interest-bearing deposits was primarily
attributable to the growth in average time deposits, which increased $58.3
million to $299.8 million in 2001 from $241.5 million in 2000. The cost of funds
decreased to 4.87% in 2001 from 5.21% in 2000, mainly as a result of the
decrease in the cost of deposits. The decrease in net interest margin in 2001 is
primarily attributable to a large percentage of the Bank's loan portfolio being
tied to the prime commercial lending rate, which results in loans repricing more
quickly than fixed rate deposits in a falling interest rate environment.
A-5
Tax-equivalent interest income on loans in 2001 increased $88,000 from the
$36.4 million recorded for 2000, following an increase of $8.0 million or 28% in
2000 over 1999. The decrease in the net interest spread to 2.89% in 2001 from
4.03% in 2000 resulted from the decrease in the yield on earning assets to 7.76%
in 2001 from 9.24% in 2000, partially offset by a decrease in the cost of funds
to 4.87% in 2001 from 5.21% in 2000.
Interest expense on FHLB borrowings totaled $2.1 million during 2001 at an
average rate of 4.98% compared to $974,000 in 2000 at an average rate of 6.16%,
and $736,000 in 1999 at an average rate of 5.44%. Interest expense on federal
funds purchased, promissory notes and demand notes payable to the U.S. Treasury
totaled $117,000, $131,000 and $46,000 for 2001, 2000 and 1999, 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, including the valuation of impaired loans in
accordance with Statement of Financial Accounting Standards (SFAS) no. 114 and
118, 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.
The provision for loan losses was $3.5 million, $1.9 million, and $425,000
for the years ended December 31, 2001, 2000 and 1999, 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 due to declining
economic conditions, nationally and locally. Please see the section below
entitled "Allowance for Loan Losses." The ratio of net charge-offs to average
loans was 0.48% in 2001, 0.29% in 2000 and 0.20% in 1999. Net charge-offs for
2001 were $2.2 million. The ratio of non-performing loans to total loans was
0.90% at December 31, 2001, as compared to 1.45% and 1.03% at December 31, 2000
and 1999, respectively.
NON-INTEREST INCOME
Non-interest income for 2001 totaled $8.3 million, an increase of $4.4
million or 113% from non-interest income of $3.9 million for 2000. The increase
in non-interest income for 2001 resulted from fees arising from a new service
provided to retail checking customers, gains recorded on the sale of available
for sale securities, and a strong demand of mortgage loan services.
Non-interest income for 2000 increased $536,000 or 16% over non-interest income
of $3.4 million for 1999 primarily due to an increase in service charges, fees
and miscellaneous other income.
Service charge income increased $1.2 million, or 77% from 2000 to 2001, as
a result of 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.
Increases in non-interest income for 2000 were attributable to an increase in
deposit volume and associated charges. Service charge income increased $262,000,
or 20% in 2000 compared to 1999.
The Company reported a net gain on sale of securities of $1.6 million in
2001, compared to a net loss on sale of securities of $483,000 during 2000 as
the Company sold $83.0 million of available for sale securities. During 1999 a
loss on sale of securities of approximately $35,000 was recognized.
Mortgage banking income increased to $1.0 million in 2001 from $241,000 in
2000 due to a strong demand for mortgage loan services. Mortgage banking income
decreased $499,000, or 67% in 2000 from the $740,000 reported in 1999. The
reduction in mortgage banking income for 2000 included a loss of $284,000
associated with the sale of jumbo mortgage loans.
NON-INTEREST EXPENSE
Total non-interest expense for 2001 amounted to $16.8 million. This was an
8% increase over the $15.5 million reported in 2000, and followed a 12% increase
in 2000 over the $13.8 million reported in 1999.
Salary and employee benefit expense was $9.1 million in 2001, compared to
$8.9 million during 2000, an increase of $216,000 or 2%, following a $1.2
million or 15% increase in salary and employee benefit expense in 2000 over
1999. The increase during 2001 resulted from merit increases. Increases during
2000 reflect merit increases, additional participation in management and
employee incentive plans, and increased staffing levels to support overall
Company growth.
The Company recorded occupancy expense of $3.0 million in 2001, compared to
$2.5 million during 2000, an increase of $474,000 or 20%, following an increase
of $279,000 or 13% in occupancy expenses in 2000 over 1999. The increase in 2001
reflects increased overhead expenses associated with new branches, existing
branch renovations and the Company's new corporate headquarters. Increases in
occupancy expense in 2000 over 1999 were due to the construction of two full
service branches and renovations associated with the Company's new corporate
headquarters.
A-6
The total of all other operating expenses increased $552,000 or 13% during
2001. Other operating expense increased $236,000 or 6% in 2000 over 1999.
INCOME TAXES
Total income tax expense was $2.3 million in 2001 compared with $2.6
million in 2000 and $2.1 million in 1999. The primary reason for the decrease
in taxes was the decrease in pretax income during 2001, following an increase in
taxes related to an increase in pretax income in 2000 over 1999. The Company's
effective tax rates were 33.08%, 32.39% and 31.55% in 2001, 2000 and 1999,
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 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, 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 $68.2 million. The Bank also had the ability to borrow
up to $10 million through The Bankers Bank as of December 31, 2001. 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 20.62% at December 31, 2001,
27.03% at December 31, 2000, and 30.26% at December 31, 1999. The December 31,
1999 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 $3.5 million during 2001. Net cash used in investing activities
of $104.6 million consisted primarily of a net change in loans of $82.1 million
and securities purchased of $118.4 million funded largely by sales, maturities
and paydowns of investment securities of $105.7 million. Net cash provided by
financing activities consisted of a $40.1 million net increase in deposits and a
$51.0 million net increase in FHLB borrowings. Additionally, the Company issued
$14.0 million in trust preferred securities in December 2001.
A-7
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, 2001.
TABLE 3 - INTEREST SENSITIVITY ANALYSIS
OVER 5 YEARS
(DOLLARS IN THOUSANDS) IMMEDIATE 1-3 MONTHS 4-12 MONTHS 1 - 5 YEARS & NON-SENSITIVE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans $ 358,729 $ 7,726 $ 18,557 $ 68,372 $ 37,224 $490,608
Mortgage loans available for sale 5,339 0 0 0 0 5,339
Investment securities 4,000 1,638 2,357 4,776 71,515 84,286
Federal funds sold 2,261 0 0 0 0 2,261
Interest bearing deposit account-FHLB 214 0 0 0 0 214
Other earning assets 0 0 0 0 3,788 3,788
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 370,543 $ 9,364 $ 20,914 $ 73,148 $ 112,527 $586,496
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW, savings, and money market deposits $ 145,592 $ 0 $ 0 $ 0 $ 0 $145,592
Certificates of deposit of $100,000 or more 12,087 27,769 106,126 10,052 0 156,034
Other time deposits 18,231 27,913 67,355 18,271 1 131,771
Other short term borrowings 378 0 0 0 0 378
FHLB borrowings 0 5,000 11,000 5,214 47,000 68,214
Trust preferred securities 0 14,000 0 0 0 14,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 176,288 $ 74,682 $ 184,481 $ 33,537 $ 47,001 $515,989
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive gap 194,255 (65,318) (163,567) 39,611 65,526 70,507
Cumulative interest-sensitive gap 194,255 128,937 (34,630) 4,981 70,507
- ------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive gap
to total earning assets 33.12% 21.98% -5.90% 0.85% 12.02%
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, 2001, 68% of the Company's interest earning assets, excluding
non-accrual loans could be repriced within one year, compared to 84% of
interest-bearing liabilities. Rate sensitive assets at December 31, 2001
totaled $586.5 million , exceeding rate sensitive liabilities of approximately
$516.0 million by $70.5 million.
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.
A-8
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, 2001 the market value of
AFS securities totaled $84.3 million, compared to $71.6 million and $62.5
million at December 31, 2000 and 1999, respectively. Table 4 presents the
market value of the presently held AFS securities for the years ended December
31, 2001, 2000 and 1999.
TABLE 4 - SUMMARY OF INVESTMENT PORTFOLIO
YEAR ENDED YEAR ENDED YEAR ENDED
(DOLLARS IN THOUSANDS) DEC 31, 2001 DEC 31, 2000 DEC 31, 1999
- -------------------------------------------------------------------------------------------------------------
UNITED STATES TREASURY SECURITIES: $ - $ - $ 900
OBLIGATIONS OF UNITED STATES GOVERNMENT
AGENCIES AND CORPORATIONS: $ - $ 25,119 $ 23,374
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS: $ 16,404 $ 22,228 $ 22,012
MORTGAGE BACKED SECURITIES: $ 63,382 $ 24,218 $ 16,212
TRUST PREFERRED SECURITIES: $ 4,500 $ - $ -
TOTAL SECURITIES: $ 84,286 $ 71,565 $ 62,498
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 $81.1 million in 2001,
$66.2 million in 2000 and $60.6 million in 1999. Table 5 presents the AFS
securities held by the Company by maturity category at December 31, 2001. Yield
information does not give effect to changes in fair value that are reflected as
a component of shareholders' equity and yields are calculated on a tax
equivalent basis.
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:
States and political subdivisions $ 3,961 7.27% $ 4,624 7.01% $ 3,513 6.37% $ 4,336 7.11% $16,434 6.96%
Mortgage backed securities - - - - - - 64,862 6.35% 64,862 6.35%
Trust Preferred securities - - - - - - 4,500 7.07% 4,500 7.07%
=======================================================================================================================
Total securities $ 3,961 7.27% $ 4,624 7.01% $ 3,513 6.37% $73,698 6.44% $85,796 6.50%
A-9
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 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, 2001, outstanding loan commitments totaled $91.8 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, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS
- ---------------------------------------------------------------------------------------------------------------------------------
BREAKDOWN OF LOAN RECEIVABLES:
Commercial, financial & agricultural $102,409 20.87% $ 96,882 23.58% $ 83,644 24.66% $ 89,536 29.68%
Real Estate - Mortgage 277,737 56.61% 229,260 55.79% 190,921 56.29% 157,167 52.11%
Real Estate - Construction 82,791 16.88% 58,939 14.34% 39,340 11.60% 29,927 9.92%
Consumer 27,671 5.64% 25,858 6.29% 25,293 7.46% 24,995 8.29%
------------------------------------------------------------------------------------------
Total loans $490,608 100.00% $410,939 100.00% $339,198 100.00% $301,625 100.00%
Less: Allowance for Loan Losses 6,091 4,713 3,924 4,137
-------- -------- -------- --------
Net Loans $484,517 $406,226 $335,274 $297,488
======== ======== ======== ========
YEAR ENDED
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS
- ------------------------------------------------------------
BREAKDOWN OF LOAN RECEIVABLES:
Commercial, financial & agricultural $ 80,230 33.42%
Real Estate - Mortgage 115,768 48.22%
Real Estate - Construction 24,291 10.12%
Consumer 19,793 8.24%
---------------------
Total loans $240,082 100.00%
Less: Allowance for Loan Losses 4,375
--------
Net Loans $235,707
========
As of December 31, 2001, gross loans outstanding were $490.6 million, an
increase of $79.7 million or 19% over the December 31, 2000 balance of $410.9
million. Most of this growth was attributable to growth in real estate loans.
Real estate mortgage loans grew $48.5 million in 2001, while real estate
construction loans grew $23.9 million in 2001. The Company experienced an
increase of $5.5 million in the commercial loan portfolio. As a percentage of
the Company's total loan portfolio, real estate mortgage loans represented
56.61% in 2001, 55.79% in 2000 and 56.29% in 1999. Over the same period
commercial loans represented 20.87%, 23.58% and 24.66% of the Company's total
loan portfolio, respectively. Real estate construction loans made up 16.88%,
14.34% and 11.60% of the Company's total loan portfolio at December 31, 2001,
2000 and 1999, respectively. Consumer loans represented 5.64%, 6.29% and 7.46%
of the Company's total loan portfolio at December 31, 2001, 2000 and 1999,
respectively.
Mortgage loans held for sale were $5.3 million at December 31, 2001, an
increase of $3.8 million over the December 31, 2000 balance of $1.6 million
which represented a decrease of $122,000 over the December 31, 1999 balance of
$1.7 million.
A-10
Table 7 identifies the maturities of all loans as of December 31, 2001 and
addresses the sensitivity of these loans to changes in interest rates.
TABLE 7 - MATURITY AND REPRICING DATA FOR LOANS
AFTER ONE
WITHIN ONE YEAR THROUGH AFTER FIVE
(DOLLARS IN THOUSANDS) YEAR OR LESS FIVE YEARS YEARS TOTAL LOANS
- ----------------------------------------------------------------------------------------------
Commercial, financial & agricultural $ 88,336 $ 11,244 $ 2,829 $ 102,409
Real Estate - Mortgage 201,461 35,520 40,756 277,737
Real Estate - Commercial 74,155 4,151 4,485 82,791
Consumer 10,032 14,024 3,615 27,671
- ----------------------------------------------------------------------------------------------
Total Loans $ 373,984 $ 64,939 $ 51,685 $ 490,608
==============================================================================================
Total fixed rate loans 12,745 64,301 51,685 128,731
Total floating rate loans 361,239 638 0 361,877
- ----------------------------------------------------------------------------------------------
Total loans $ 373,984 $ 64,939 $ 51,685 $ 490,608
==============================================================================================
ALLOWANCE FOR LOAN LOSSES
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 loan portfolio in an
effort to review 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 affect the allowance for
potential credit losses.
An analysis of the credit quality of the 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. 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.
An allowance for loan losses is also established, as necessary, for
individual loans considered to be impaired in accordance with SFAS No. 114. A
loan is considered 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. 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 collateral if the
loan is collateral dependent. At December 31, 2001 and 2000, the recorded
investment in loans that were considered to be impaired under SFAS No. 114 was
approximately $4.4 million and $6.0 million, respectively, with related
allowance for loan losses of approximately $699,000 and $925,000, respectively.
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 the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
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.
A-11
The Company grants loans and extensions of credit primarily within the
Catawba Valley region of North Carolina, which encompasses Catawba, Alexander,
Iredell and Lincoln counties. Although the Bank has a diversified loan
portfolio, a substantial portion of the loan portfolio is collateralized by real
estate, which is dependent upon the real estate market. Non-real estate
commercial loans also can be affected by local economic conditions. At
December 31, 2001, approximately 8% 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.
Total non-performing loans were $4.4 million in 2001, $6.0 million in 2000
and $3.5 million in 1999. The ratio of net charge-offs to average total loans
was 0.48% in 2001, 0.29% in 2000 and 0.20% in 1999. The ratio of non-performing
loans to total loans was 0.90% at December 31, 2001, as compared to 1.45% and
1.04% at December 31, 2000 and 1999, respectively. The allowance for loan losses
totaled $6.1 million, representing 1.24% of total loans outstanding at December
31, 2001. For December 31, 2000 and 1999, the allowance for loan losses amounted
to $4.7 million, or 1.15% of total loans outstanding and $3.9 million, or 1.16%
of total loans outstanding, respectively.
Table 8 presents an analysis of the allowance for loan losses, including
charge-off activity.
TABLE 8 - 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) 2001 2000 1999 1998 1997
============================================================================================================================
RESERVE FOR LOAN LOSSES AT BEGINNING $ 4,713 $ 3,924 $ 4,137 $ 4,375 $ 3,745
LOANS CHARGED OFF:
Commercial, financial, and agriculture 842 857 485 608 8
Real estate - mortgage 790 10 25 - -
Real estate - construction 51 36 - - -
Consumer 675 255 195 138 131
- ----------------------------------------------------------------------------------------------------------------------------
Total loans charged off $ 2,358 $ 1,158 $ 705 $ 746 $ 139
- ----------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOSSES PREVIOUSLY CHARGED OFF:
Commercial, financial, and agriculture 84 20 24 39 60
Real estate - mortgage - - - - -
Real estate - construction 6 - - - -
Consumer 101 48 43 24 12
- ----------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 191 $ 68 $ 67 $ 63 $ 72
- ----------------------------------------------------------------------------------------------------------------------------
Net loans charged off $ 2,167 $ 1,090 $ 638 $ 683 $ 67
Provision for loan losses 3,545 1,879 425 445 697
- ----------------------------------------------------------------------------------------------------------------------------
Reserve for loan losses at end of year $ 6,091 $ 4,713 $ 3,924 $ 4,137 $ 4,375
============================================================================================================================
Loans charged off net of recoveries, as
a percent of average loans outstanding 0.48% 0.29% 0.20% 0.25% 0.03%
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 $4.7
million at December 31, 2001 compared to $6.1 million at December 31, 2000. This
decrease is a result of the resolution of two large problem credits included in
non-performing assets at December 31, 2000, which resulted in charge-offs of
$746,000 in 2001.
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-12
A summary of non-performing assets at December 31 for each of the years
presented is shown in table 9.
TABLE 9 - NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------
YEAR 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Nonaccrual loans $3,756 $5,421 $2,866 $3,292 $3,075
Loans 90 days or more past due and still accruing 655 545 645 328 586
Total non-performing loans 4,411 5,966 3,511 3,620 3,661
All other real estate owned 256 112 44 545 -
Total non-performing assets $4,667 $6,078 $3,555 $4,165 $3,661
AS A PERCENT OF TOTAL LOANS AT YEAR END
Non-accrual loans 0.77% 1.32% 0.84% 1.09% 1.28%
Loans 90 days or more past due and still accruing 0.13% 0.13% 0.19% 0.11% 0.24%
Total non-performing assets 0.95% 1.48% 1.05% 1.38% 1.52%
At December 31, 2001 the Company had non-performing loans, defined as
non-accrual and accruing loans past due more than 90 days, of $4.4 million or
0.90% of total loans. Non-performing loans for 2000 were $6.0 million, or 1.45%
of total loans and $3.5 million, or 1.03% of total loans for 1999. Interest that
would have been recorded on non-accrual loans for the years ended December 31,
2001, 2000 and 1999, had they performed in accordance with their original terms,
amounted to approximately $695,000, $508,000 and $333,000 respectively. Interest
income on non-accrual loans included in the results of operations for 2001,
2000, and 1999 amounted to approximately $22,000, $94,000 and $61,000,
respectively.
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.
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 $156.0 million at December 31, 2001, $129.1 million and $89.3 million at
December 31, 2000 and 1999, 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, 2001, total deposits were $490.2 million, an increase of
$40.1 million or 9% increase over the December 31, 2000 balance of $450.1
million. The increase in deposits is primarily attributable to growth in time
deposits which resulted from deposit campaigns throughout 2001.
Table 10 is a summary of the maturity distribution of certificates of deposit in
amounts of $100,000 or more as of December 31, 2001.
TABLE 10 - MATURITIES OF TIME DEPOSITS OVER $100,000
(DOLLARS IN THOUSANDS)
================================================
MATURITY PERIOD AMOUNT
================================================
Three months or less $ 39,855
Over three months through six months 59,869
Over six months through twelve months 46,257
Over twelve months 10,053
--------
Total $156,034
========
A-13
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, 2001, FHLB borrowings totaled $68.2
million compared to $21.4 million at December 31, 2000 and $14.5 million at
December 31, 1999. Average FHLB borrowings for 2001 were $42.5 million, compared
to average balances of $15.8 million for 2000 and $13.5 million for 1999. The
maximum amount of outstanding FHLB borrowings was $68.2 million in 2001, and
$21.4 in 2000 and $14.5 in 1999. The FHLB advances outstanding at December 31,
2001 had both fixed and adjustable interest rates ranging from 1.83% to 6.16%.
Approximately $16.0 million of the FHLB advances outstanding mature prior to
December 31, 2002. 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
$118,000 at December 31, 2001 and $1.6 million at December 31, 2000 and 1999,
respectively.
TRUST PREFERRED SECURITIES
In December, 2001 the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust I ("PEBK Trust"), which issued $14 million of
guaranteed preferred beneficial interests in the Company's junior subordinated
deferrable interest debentures that qualify as Tier I capital under Federal
Reserve Board guidelines. All of the common securities of PEBK Trust are owned
by the Company. The proceeds from the issuance of the common securities and the
trust preferred securities were used by PEBK Trust to purchase $14.4 million of
junior subordinated debentures of the Company, which pay interest at a floating
rate equal to prime plus 50 basis points. The proceeds received by the Company
from the sale of the junior subordinated debentures were used for general
purposes, primarily to provide capital to the Bank. The debentures represent
the sole asset of PEBK Trust. The debentures and related earnings statement
effects are eliminated in the Company's financial statements.
The Trust Preferred Securities accrue and pay quarterly distributions based
on the liquidation value of $50,000 per capital security at a floating rate of
prime plus 50 basis points. The Company has guaranteed distributions and other
payments due on the Trust Preferred Securities to the extent PEBK Trust has
funds with which to make the distributions and other payments. The net combined
effect of all the documents entered into in connection with the Trust Preferred
Securities is that the Company is liable to make the distributions and other
payments required on the Trust Preferred Securities.
The Trust Preferred Securities are mandatorily redeemable upon maturity of
the debentures on December 31, 2031, or upon earlier redemption as provided in
the indenture. The Company has the right to redeem the debentures purchased by
PEBK Trust, in whole or in part, on or after December 31, 2006. As specified in
the indenture, if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount and any accrued but unpaid interest.
CAPITAL RESOURCES
Shareholders' equity at December 31, 2001 was $45.4 million compared to
$43.0 million and $38.0 million at December 31, 2000 and 1999, respectively. At
December 31, 2001, unrealized gains and losses net of tax in the
available-for-sale securities portfolio amounted to a loss of approximately
$922,000. For the years ended December 31, 2000 and 1999, unrealized gains and
losses net of tax in the available-for-sale securities portfolio amounted to a
gain of approximately $4,000 and a loss of approximately $920,000, 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 8.25%, 9.13% and 9.43% for 2001, 2000 and
1999. The return on average shareholders' equity was 9.65% at December 31,
2001 as compared to 12.55% and 11.54% as of December 31, 2000 and December 31,
1999, 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. Tier 1
capital at December 31, 2001 includes $14.0 million in trust preferred
securities. The Company's Tier I capital ratio was 11.14%, 10.11% and 10.99% at
December 31, 2001, 2000 and 1999, 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 12.27%, 11.22% and 12.11% at December 31, 2001, 2000 and 1999,
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 10.46%, 9.10% and 9.21% at
December 31, 2001, 2000 and 1999, 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,
2001, 2000 and 1999, respectively.
A-14
The Company's key equity ratios as of December 31, 2001, 2000 and 1999 are
presented in Table 11:
TABLE 11 - EQUITY RATIOS
YEARS ENDED DECEMBER 31,
2001 2000 1999
========================================================
Return on average assets 0.80% 1.15% 1.09%
Return on average equity 9.65% 12.55% 11.54%
Dividend payout ratio 28.14% 23.39% 23.84%
Average equity to average assets 8.25% 9.13% 9.43%
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.
QUARTERLY FINANCIAL DATA
The Company's consolidated quarterly operating results for the years ended
December 31, 2001 and 2000 are presented in table 12. The increase in provision
for loan losses in fourth quarter 2001 reflects the charge off of two large
loans during fourth quarter.
TABLE 12 - QUARTERLY FINANCIAL DATA
2001 2000
---------------------------------- ----------------------------------
(in thousands, except per share amounts)
First Second Third Fourth First Second Third Fourth
---------- ------ ------ ------ ---------- ------ ------ ------
Total interest income $ 10,935 10,849 10,568 9,546 $ 9,077 9,838 10,754 11,190
Total interest expense 5,905 5,998 5,952 5,172 4,015 4,428 5,176 5,814
---------------------------------- ----------------------------------
Net interest income 5,030 4,851 4,616 4,374 5,062 5,410 5,578 5,376
Provision for loan losses 429 453 760 1,903 256 523 640 460
Other income 1,602 1,990 2,110 2,561 863 1,141 868 1,044
Other expense 4,160 4,370 3,864 4,358 3,793 4,040 3,731 3,945
---------------------------------- ----------------------------------
Income before income taxes 2,043 2,018 2,102 674 1,876 1,988 2,075 2,015
Income taxes 672 668 716 206 606 646 689 635
---------------------------------- ----------------------------------
Net earnings $ 1,371 1,350 1,386 468 $ 1,270 1,342 1,386 1,380
================================== ==================================
Net earnings per share $ 0.42 0.42 0.43 0.15 $ 0.39 0.42 0.43 0.43
================================== ==================================
A-15
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, 2001, 2000 and 1999, the Company has used interest rate contracts
to manage market risk. 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. For the years ended
December 31, 2001 the Company recognized no interest expense related to
derivative financial instruments. The Company expensed $3,200 and $22,944 for
the years ended December 31, 2000 and 1999, respectively, related to derivative
financial instruments. The Company had no off-balance sheet derivative
financial instruments at December 31, 2001.
Table 13 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, 2001. 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, 2001. 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 13- MARKET RISK TABLE
(IN THOUSANDS) PRINCIPAL/NOTIONAL AMOUNT MATURING IN:
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED DECEMBER
LOANS RECEIVABLE 31, 2002 31, 2003 31, 2004
==========================================================================================================
Fixed rate $ 17,544 $ 18,126 $ 18,736
Average interest rate 11.58% 8.48% 7.96%
Variable rate $ 129,765 $ 48,511 $ 35,072
Average interest rate 5.94% 5.35% 5.37%
INVESTMENT SECURITIES
==========================================================================================================
Interest bearing cash $ 214 $ - $ -
Average interest rate 1.83% - -
Federal funds sold $ 2,261 $ - $ -
Average interest rate 2.18% - -
Securities available for sale $ 3,070 $ 1,808 $ 4,307
Average interest rate 7.91% 4.89% 6.42%
Nonmarketable equity securities $ - $ - $ -
Average interest rate - - -
DEBT OBLIGATIONS
==========================================================================================================
Deposits $ 273,321 $ 24,328 $ 4,491
Average interest rate 4.77% 3.74% 3.83%
Advances from FHLB $ 16,000 $ 214 $ -
Average interest rate 1.88% 5.86% 0.00%
Demand Notes payable to U.S. Treasury $ 118 $ - $ -
Average interest rate 1.43% - -
YEARS ENDED
LOANS RECEIVABLE DECEMBER 31, 2005 & 2006 THEREAFTER TOTAL FAIR VALUE
======================================================================================================
Fixed rate $ 32,021 $ 45,417 $131,844 $ 135,532
Average interest rate 8.01% 8.65%
Variable rate $ 50,728 $ 94,688 $358,764 $ 364,170
Average interest rate 5.47% 5.54%
INVESTMENT SECURITIES
======================================================================================================
Interest bearing cash $ - $ - $ 214 $ 214
Average interest rate - -
Federal funds sold $ - $ - $ 2,261 $ 2,261
Average interest rate - -
Securities available for sale $ 2,934 $ 72,166 $ 84,286 $ 84,286
Average interest rate 6.02% 5.97%
Nonmarketable equity securities $ - $ 4,603 $ 4,603 $ 4,603
Average interest rate - -
DEBT OBLIGATIONS
======================================================================================================
Deposits $ 779 $ 187,305 $490,223 $ 493,303
Average interest rate 5.84% 0.76%
Advances from FHLB $ 5,000 $ 47,000 $ 68,214 $ 68,497
Average interest rate 0.00% 4.58%
Demand Notes payable to U.S. Treasury $ - $ - $ 118 $ 118
Average interest rate - -
A-16
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". Scott and
Stringfellow, Inc., Ryan, Beck & Co., and Trident Securities, Inc. are market
makers for the Company's shares.
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 1, 2002, the Company had 670 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 $15.85 on March 1, 2002.
Following is certain market and dividend information for the last two
fiscal years. Information for quarters prior to the third quarter of 2000
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
2001 LOW BID HIGH BID PER SHARE
First Quarter $ 13.000 $ 16.000 $ 0.10
Second Quarter $ 16.050 $ 13.500 $ 0.10
Third Quarter $ 16.000 $ 20.000 $ 0.10
Fourth Quarter $ 14.100 $ 17.000 $ 0.10
CASH DIVIDEND
2000 LOW BID HIGH BID PER SHARE
First Quarter $ 11.591 $ 13.636 $ 0.09
Second Quarter $ 12.159 $ 16.250 $ 0.10
Third Quarter $ 12.000 $ 13.625 $ 0.10
Fourth Quarter $ 11.625 $ 13.500 $ 0.10
A-17
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 and Treasurer; Elmore
Construction Company, Inc.
GARY E. MATTHEWS
- ------------------
President 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 and Corporate Secretary
LANCE A. SELLERS
- ------------------
Executive Vice President and Assistant Corporate Secretary
WILLIAM D. CABLE
- ------------------
Executive Vice President and Assistant Corporate Treasurer
A. JOSEPH LAMPRON
- -------------------
Executive Vice President, Chief Financial Officer and Corporate Treasurer
A-18
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, 2001 and 2000, 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, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 18, 2002
Certified Public Accountants
- --------------------------------------------------------------------------------
Suite 1800 - 235 Peachtree Street NE - Atlanta, GA 30303 - Phone 404-588-4200
Fax 404-588-4222
A-19
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------- -----------
Assets
------
Cash and due from banks, including reserve requirements
of $2,246,000 and $4,739,000 $ 13,042,320 13,619,197
Federal funds sold 2,261,000 5,020,000
------------- -----------
Cash and cash equivalents 15,303,320 18,639,197
Investment securities available for sale 84,286,037 71,564,844
Other investments 4,602,773 2,398,873
Mortgage loans held for sale 5,338,931 1,563,700
Loans, net 484,517,151 406,226,100
Premises and equipment, net 14,679,191 12,907,968
Cash surrender value of life insurance 4,583,000 -
Accrued interest receivable and other assets 6,194,301 5,701,105
------------- -----------
$619,504,704 519,001,787
============= ===========
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 56,826,130 52,793,390
Interest-bearing 433,397,059 397,279,952
------------- -----------
Total deposits 490,223,189 450,073,342
Demand notes payable to U. S. Treasury 117,987 1,600,000
Accrued interest payable and other liabilities 1,548,139 2,932,284
Federal Home Loan Bank advances 68,214,286 21,357,142
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (Trust Preferred Securities) 14,000,000 -
------------- -----------
Total liabilities 574,103,601 475,962,768
------------- -----------
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;
3,218,714 shares issued and outstanding 36,407,798 36,407,798
Retained earnings 9,915,399 6,627,533
Accumulated other comprehensive income (loss) (922,094) 3,688
------------- -----------
Total shareholders' equity 45,401,103 43,039,019
------------- -----------
$619,504,704 519,001,787
============= ===========
See accompanying notes to consolidated financial statements.
A-20
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
---------------- ----------- -----------
Interest income:
Interest and fees on loans $ 36,512,395 36,423,973 28,375,391
Interest on federal funds sold 126,791 281,659 338,941
Interest and dividends on securities:
U. S. Treasuries - 16,572 50,221
U. S. Government agencies 3,918,551 2,977,459 2,297,645
State and political subdivisions 911,707 988,020 973,744
Other 428,157 171,600 266,097
---------------- ----------- -----------
Total interest income 41,897,601 40,859,283 32,302,039
---------------- ----------- -----------
Interest expense:
Deposits 20,790,136 18,326,359 14,009,018
Federal Home Loan Bank advances 2,118,511 974,036 735,752
Other 117,849 131,705 45,501
---------------- ----------- -----------
Total interest expense 23,026,496 19,432,100 14,790,271
---------------- ----------- -----------
Net interest income 18,871,105 21,427,183 17,511,768
Provision for loan losses 3,545,322 1,879,100 425,000
---------------- ----------- -----------
Net interest income after provision for loan losses 15,325,783 19,548,083 17,086,768
---------------- ----------- -----------
Other income:
Service charges on deposit accounts 2,805,492 1,588,390 1,326,810
Other service charges and fees 471,998 367,352 298,454
Gain (loss) on sale of securities 1,613,992 (483,472) (34,824)
Mortgage banking income 1,014,043 241,007 740,031
Insurance and brokerage commissions 348,582 168,557 129,786
Miscellaneous 2,008,797 2,033,930 919,804
---------------- ----------- -----------
Total other income 8,262,904 3,915,764 3,380,061
---------------- ----------- -----------
Other expenses:
Salaries and employee benefits 9,115,496 8,899,285 7,737,404
Occupancy 2,984,100 2,509,720 2,230,448
Other operating 4,652,197 4,099,972 3,863,652
---------------- ----------- -----------
Total other expenses 16,751,793 15,508,977 13,831,504
---------------- ----------- -----------
Earnings before income taxes 6,836,894 7,954,870 6,635,325
Income tax expense 2,261,542 2,576,400 2,093,380
---------------- ----------- -----------
Net earnings $ 4,575,352 5,378,470 4,541,945
================ =========== ===========
Net earnings per share $ 1.42 1.67 1.41
================ =========== ===========
See accompanying notes to consolidated financial statements.
A-21
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Accumulated
Common Stock Other
------------------------ Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
---------- ------------ ----------- -------------- -----------
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
Cash dividends declared ($0.40 per share) - - (1,287,486) - (1,287,486)
Net earnings - - 4,575,352 - 4,575,352
Change in net unrealized gain (loss) on
investment securities available for
sale, net of tax - - - (925,782) (925,782)
---------- ------------ ----------- -------------- -----------
Balance, December 31, 2001 3,218,714 $36,407,798 9,915,399 (922,094) 45,401,103
========== ============ =========== ============== ===========
See accompanying notes to consolidated financial statements.
A-22
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ --------- -----------
Net earnings $ 4,575,352 5,378,470 4,541,945
------------ --------- -----------
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale 97,560 1,030,186 (2,293,615)
Reclassification adjustment for (gains) losses on
sales of investment securities available for sale (1,613,992) 483,472 34,824
------------ --------- -----------
Total other comprehensive income (loss),
before income taxes (1,516,432) 1,513,658 (2,258,791)
------------ --------- -----------
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding gains (losses) on investment
securities available for sale 38,000 401,258 (893,363)
Reclassification adjustment for (gains) losses on
sales of investment securities available for sale (628,650) 188,312 13,564
------------ --------- -----------
Total income tax expense (benefit) related to
other comprehensive income (590,650) 589,570 (879,799)
------------ --------- -----------
Total other comprehensive income (loss),
net of tax (925,782) 924,088 (1,378,992)
------------ --------- -----------
Total comprehensive income $ 3,649,570 6,302,558 3,162,953
============ ========= ===========
See accompanying notes to consolidated financial statements.
A-23
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------------- ------------ ------------
Cash flows from operating activities:
Net earnings $ 4,575,352 5,378,470 4,541,945
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion 1,584,437 1,531,860 1,794,646
Provision for loan losses 3,545,322 1,879,100 425,000
Provision for deferred taxes (532,329) (246,511) 915,285
Loss (gain) on sale of investment securities (1,613,992) 483,472 34,824
Loss (gain) on sale of premises and equipment - (598,308) 12,925
Loss (gain) on sale of mortgage loans (37,152) 292,796 369,583
Loss (gain) on sale of other real estate 51,840 (9,226) 64,943
Change in:
Other assets 1,017,755 (1,090,782) (1,006,947)
Other liabilities (1,384,145) 1,230,278 (797,420)
Mortgage loans held for sale (3,738,079) (171,024) 7,204,762
-------------- ------------ ------------
Net cash provided by operating activities 3,469,009 8,680,125 13,559,546
-------------- ------------ ------------
Cash flows from investing activities:
Purchase of investment securities available for sale (118,372,897) (33,291,361) (23,737,969)
Proceeds from calls and maturities of investment securities
available for sale 22,714,408 7,139,920 15,076,886
Proceeds from sales of investment securities available
for sale 82,969,419 18,129,483 6,896,296
Change in other investments (2,203,900) (1,053,773) 150,200
Purchase of cash value life insurance (4,583,000) - -
Net change in loans (82,092,812) (72,926,623) (38,273,585)
Purchases of premises and equipment (3,652,961) (2,243,860) (1,857,657)
Proceeds from sale of premises and equipment 645,429 1,916,505 4,500
Construction in progress (100,633) (3,779,053) (870,284)
Improvements to other real estate - - (241,951)
Proceeds from sale of other real estate 60,310 36,426 740,962
-------------- ------------ ------------
Net cash used by investing activities (104,616,637) (86,072,336) (42,112,602)
-------------- ------------ ------------
Cash flows from financing activities:
Net change in deposits 40,149,847 73,438,973 26,566,991
Net change in demand notes payable to U. S. Treasury (1,482,013) - 1,460,765
Proceeds from FHLB borrowings 51,000,000 18,000,000 1,000,000
Payments of FHLB advances (4,142,856) (11,142,858) (142,857)
Proceeds from issuance of trust preferred securities 14,000,000 - -
Transaction costs associated with trust preferred securities (425,741) - -
Cash dividends (1,287,486) (1,258,243) (1,082,738)
Cash paid in lieu of fractional shares - (3,775) (5,871)
-------------- ------------ ------------
Net cash provided by financing activities 97,811,751 79,034,097 27,796,290
-------------- ------------ ------------
Net change in cash and cash equivalents (3,335,877) 1,641,886 (756,766)
Cash and cash equivalents at beginning of year 18,639,197 16,997,311 17,754,077
-------------- ------------ ------------
Cash and cash equivalents at end of year $ 15,303,320 18,639,197 16,997,311
============== ============ ============
A-24
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ---------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $23,068,630 18,952,793 14,812,486
Income taxes $ 3,209,000 2,663,000 1,000,000
Noncash investing and financing activities:
Change in net unrealized gain(loss) on investment
securities available for sale, net of tax $ (925,782) 924,088 (1,378,992)
Transfer of loans to other real estate $ 256,439 95,000 123,451
Financed sales of other real estate $ - - 60,000
See accompanying notes to consolidated financial statements.
A-25
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, Lincoln and Iredell 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.
Real Estate Advisory 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 subsidiaries,
PEBK Capital Trust I and Peoples Bank, along with its wholly owned
subsidiaries, Peoples Investment Services, Inc. and Real Estate Advisory
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 accounting principles generally
accepted in the United States of America ("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.
Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 presentation. Such reclassifications
had no effect on net earnings or total assets.
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,
2001 and 2000, the Company had classified all of its investment securities
as available for sale.
Available for sale securities are recorded at fair value. 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-26
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, 2001 and 2000, 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. In determining the adequacy of the allowance for loan losses,
management uses a loan grading system that rates individual loans into nine
risk classifications. These risk categories are assigned allocations of
loss based on management's estimate of potential loss which is generally
based on an analysis of historical loss experience, current economic
conditions, performance trends, and discounted collateral deficiencies. The
combination of these results is compared monthly to the recorded allowance
for loan losses and material differences are adjusted by increasing or
decreasing the provision for loan losses. Management uses an independent
external loan reviewer to challenge and corroborate the loan grading system
and provide additional analysis in determining the adequacy of the
allowance for loan losses and the future provisions for estimated 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 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.
A-27
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Mortgage Banking Activities, continued
-----------------------------
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. The Company recognized
servicing assets of approximately $61,000, $172,000 and $610,000 during
2001, 2000 and 1999, respectively, and amortized approximately $196,000,
$220,000 and $212,000 during 2001, 2000 and 1999, 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 approximately $79,128,000 and $97,899,000 at December 31,
2001 and 2000, respectively.
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 2001, 2000, and 1999.
Derivative Financial Instruments
----------------------------------
To manage interest rate risk, the Company uses purchased interest rate
floors and caps. Interest rate floors and caps are agreements whereby the
Bank obtains the right receive interest payments when an interest rate
moves above or below a specified floor or cap rate. 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. The derivative instrument is recorded at fair value and the
accounting for the changes in the fair value of the instrument depends upon
its intended use 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 as a component of 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.
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Earnings Per Share
-------------------------
Net earnings per 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, 2001, 2000 and 1999,
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, 2001,
2000 and 1999 are computed based on weighted average shares outstanding of
3,218,714.
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.
Recent Accounting Pronouncements
--------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of SFAS No. 125", was effective for transfers
and servicing of financial assets occurring after March 31, 2001 and was
effective for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The
implementation of SFAS No. 140 did not have a material impact on the
Company's financial position, results of operations or liquidity.
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 is effective for business combinations
initiated after June 30, 2001 and requires all business combinations
completed after its adoption to be accounted for under the purchase method
of accounting and establishes specific criteria for the recognition of
intangible assets separately from goodwill. SFAS No. 142 will be effective
for the Company on January 1, 2002 and addresses the accounting for
goodwill and intangible assets subsequent to their initial recognition.
Upon adoption of SFAS No. 142, goodwill and some intangible assets will no
longer be amortized and will be tested for impairment at least annually.
The Company believes the adoption of SFAS No. 142 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, 2001 and 2000 are
as follows:
December 31, 2001
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
Mortgage-backed securities $64,862,499 99,308 1,579,620 63,382,187
State and political subdivisions 16,433,929 242,972 273,051 16,403,850
Trust preferred securities 4,500,000 - - 4,500,000
----------- ---------- ---------- ----------
Total $85,796,428 342,280 1,852,671 84,286,037
=========== ========== ========== ==========
A-29
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
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
=========== ========== ========== ==========
The amortized cost and fair value of investment securities available for
sale at December 31, 2001, 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 $ 3,960,963 3,995,251
Due from one to five years 4,624,279 4,775,590
Due from five to ten years 3,512,815 3,539,473
Due after ten years 8,835,872 8,593,536
Mortgage-backed securities 64,862,499 63,382,187
----------- ----------
$85,796,428 84,286,037
=========== ==========
Proceeds from sales of securities available for sale during 2001, 2000, and
1999 were $82,969,419, $18,129,483 and $6,896,296, respectively. Gross
gains of $1,626,583 and $39,788 for 2001 and 1999, respectively, along with
gross losses of $12,591, $483,472 and $74,612 for 2001, 2000 and 1999,
respectively, were realized on those sales.
Securities with a carrying value of approximately $27,210,000 and
$26,022,000 at December 31, 2001 and 2000, respectively, were pledged to
secure public deposits and for other purposes as required by law.
(4) LOANS
Major classifications of loans at December 31, 2001 and 2000 are summarized
as follows:
2001 2000
------------ -----------
Commercial $102,409,403 96,881,936
Real estate - mortgage 277,737,352 229,260,731
Real estate - construction 82,790,441 58,938,765
Consumer 27,670,525 25,857,895
------------ -----------
Total loans 490,607,721 410,939,327
Less allowance for loan losses 6,090,570 4,713,227
------------ -----------
Total net loans $484,517,151 406,226,100
============ ===========
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.
A-30
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) LOANS, CONTINUED
At December 31, 2001 and 2000, the Company had nonaccrual loans
approximating $3,756,000 and $5,421,000, respectively. In addition, the
Company had approximately $655,000 and $545,000 in loans past due more than
ninety days and still accruing interest at December 31, 2001 and 2000,
respectively. Interest income that would have been recorded on nonaccrual
loans for the years ended December 31, 2001, 2000, and 1999, had they
performed in accordance with their original terms, amounted to
approximately $695,000, $508,000 and $333,000, respectively. Interest
income on nonaccrual loans included in the results of operations for 2001,
2000 and 1999 amounted to approximately $22,000, $94,000 and $61,000,
respectively.
At December 31, 2001 and 2000, the recorded investment in loans that were
considered to be impaired under SFAS No. 114 was approximately $4,408,909
and $5,966,000, respectively, of which approximately $3,756,000 at December
31, 2001 and $5,421,000 at December 31, 2000 was on nonaccrual. The related
allowance for loan losses on these loans was approximately $699,000 and
$925,000 at December 31, 2001 and 2000, respectively. The average recorded
investment in impaired loans for the twelve months ended December 31, 2001
and 2000 was approximately $5,743,000 and $3,673,000, respectively. For the
years ended December 31, 2001, 2000, and 1999, the Company recognized
approximately $38,000, $94,000 and $61,000, respectively, of interest
income on impaired loans.
Changes in the allowance for loan losses were as follows:
2001 2000 1999
------------- ----------- ----------
Balance at beginning of year $ 4,713,227 3,924,348 4,136,690
Amounts charged off (2,358,320) (1,158,381) (705,277)
Recoveries on amounts previously charged off 190,341 68,160 67,935
Provision for loan losses 3,545,322 1,879,100 425,000
------------ ----------- ----------
Balance at end of year $ 6,090,570 4,713,227 3,924,348
============ =========== ==========
(5) PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2001 2000
------------ ----------
Land $ 2,844,746 3,300,561
Buildings and improvements 9,847,402 3,990,234
Furniture and equipment 9,427,871 7,278,731
----------- ----------
22,120,019 14,569,526
Less accumulated depreciation 7,541,460 6,310,895
----------- ----------
14,578,559 8,258,631
Construction in progress 100,632 4,649,337
----------- ----------
$14,679,191 12,907,968
=========== ==========
Depreciation expense was approximately $1,337,000, $1,139,000 and
$1,175,000, for the years ended December 31, 2001, 2000, and 1999,
respectively.
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) TIME DEPOSITS
The aggregate amount of time deposit accounts with a minimum denomination
of $100,000 was $156,034,091 and $129,111,812 at December 31, 2001 and
2000, respectively.
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
2002 $259,481,261
2003 23,053,831
2004 4,490,824
2005 554,826
2006 and thereafter 224,449
------------
$287,805,191
============
(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
1.83% to 6.16% at December 31, 2001. The FHLB advances are collateralized
by a blanket assignment on all residential first mortgage loans and
commercial real estate loans that the Bank owns.
Advances from the FHLB outstanding at December 31, 2001 mature as follows:
Year
----
2002 $16,000,000
2003 214,286
2005 5,000,000
2010 12,000,000
2011 35,000,000
-----------
$68,214,286
===========
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, 2001 and 2000 the Bank owned
FHLB stock amounting to $3,410,800 and $1,206,900, respectively.
(8) TRUST PREFERRED SECURITIES
In December, 2001 the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust I ("PEBK Trust"), which issued $14 million of
guaranteed preferred beneficial interests in the Company's junior
subordinated deferrable interest debentures that qualify as Tier I capital
under Federal Reserve Board guidelines. All of the common securities of
PEBK Trust are owned by the Company. The proceeds from the issuance of the
common securities and the trust preferred securities were used by PEBK
Trust to purchase $14.4 million of junior subordinated debentures of the
Company, which pay interest at a floating rate equal to prime plus 50 basis
points. The proceeds received by the Company from the sale of the junior
subordinated debentures were used for general purposes, primarily to
provide capital to the Bank. The debentures represent the sole asset of
PEBK Trust. The debentures and related earnings statement effects are
eliminated in the Company's financial statements.
The Trust Preferred Securities accrue and pay quarterly distributions based
on the liquidation value of $50,000 per capital security at a floating rate
of prime plus 50 basis points. The Company has guaranteed distributions and
other payments due on the Trust Preferred Securities to the extent PEBK
Trust has funds with which to make the distributions and other payments.
The net combined effect of all the documents entered into in connection
with the Trust Preferred Securities is that the Company is liable to make
the distributions and other payments required on the Trust Preferred
Securities.
A-32
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) TRUST PREFERRED SECURITIES, CONTINUED
The Trust Preferred Securities are mandatorily redeemable upon maturity of
the debentures on December 31, 2031, or upon earlier redemption as provided
in the indenture. The Company has the right to redeem the debentures
purchased by PEBK Trust, in whole or in part, on or after December 31,
2006. As specified in the indenture, if the debentures are redeemed prior
to maturity, the redemption price will be the principal amount and any
accrued but unpaid interest.
(9) INCOME TAXES
The provision for income taxes is summarized as follows:
2001 2000 1999
----------- ---------- ---------
Current $2,793,871 2,822,911 1,178,095
Deferred (532,329) (246,511) 915,285
----------- ---------- ---------
$2,261,542 2,576,400 2,093,380
=========== ========== =========
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:
2001 2000 1999
----------- ---------- ----------
Pre-tax income at statutory rates (34%) $2,324,544 2,704,656 2,256,010
Differences:
Tax exempt interest income (331,035) (354,948) (343,143)
Nondeductible interest and other expense 56,330 64,717 54,805
Other, net (16,444) (22,229) 30,642
State taxes, net of federal benefit 228,147 184,204 95,066
----------- ---------- ----------
$2,261,542 2,576,400 2,093,380
=========== ========== ==========
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, 2001 and 2000.
2001 2000
---------- ---------
Deferred tax assets:
Allowance for loan losses $1,938,983 1,341,505
Amortizable intangible assets 262,652 228,305
Accrued retirement expense 92,520 103,599
Accrued contingent liabilities 9,639 83,644
Foreclosed real estate 16,193 24,669
Income from non-accrual loans 254,247 250,330
Unrealized loss on available for sale securities 588,296 -
Other 24,520 9,076
---------- ---------
Total gross deferred tax assets 3,187,050 2,041,128
---------- ---------
Deferred tax liabilities:
Unrealized gain on available for sale securities - 2,354
Deferred loan fees 1,225,178 1,187,215
Premises and equipment 133,467 150,744
Deferred income from servicing rights 378,386 349,278
Other - 24,497
---------- ---------
Total gross deferred tax liabilities 1,737,031 1,714,088
---------- ---------
Net deferred tax asset $1,450,019 327,040
========== =========
A-33
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) 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
2001:
Beginning balance $ 13,088,000
New loans 4,375,000
Repayments (3,681,000)
-----------
Ending balance $ 13,782,000
===========
At December 31, 2001 and 2000, the Company had deposit relationships with
related parties of approximately $11,955,000 and $8,800,000, respectively.
The Company also enters into contracts from time to time with certain
directors for the construction of bank facilities. At December 31, 2001,
the Company had outstanding construction contracts with these directors
amounting to approximately $1,100,000. During the year ended December 31,
2001, 2000 and 1999, total construction costs for bank facilities paid to
directors was approximately $1,435,000, $2,915,000 and $374,000,
respectively.
(11) 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, 2001 are as follows:
Year Amount
---- ------
2002 $ 328,908
2003 330,908
2004 340,908
2005 340,908
2006 191,873
Thereafter 1,155,750
----------
Total minimum obligation $2,689,255
==========
Total rent expense was approximately $351,000, $361,000 and $262,000, for
2001, 2000, and 1999, 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.
A-34
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) COMMITMENTS, CONTINUED
In most cases, the Company does require collateral or other security to
support financial instruments with credit risk.
Contractual Amount
------------------------
2001 2000
------------ ----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 91,822,000 89,407,000
Standby letters of credit $ 1,667,000 2,208,000
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.
In the normal course of business, the Company is a party (both as plaintiff
and defendant) to a number of lawsuits. In the opinion of management and
counsel, none of these cases should have a material adverse effect on the
financial position of the Bank or the Company.
The Company has $16,500,000 available for the purchase of overnight federal
funds from three correspondent financial institutions.
(12) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS
The Company has a profit sharing and 401(k) plan for the benefit 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 $318,000, $249,000
and $163,000, for the years of 2001, 2000, and 1999, respectively. The
Board of Directors elected not to make a discretionary contribution in
2001, 2000, or 1999. 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.
During December, 2001, the Company initiated a postretirement benefit plan
to provide retirement benefits to key officers and its Board of Directors
and to provide death benefits for their designated beneficiaries. Under the
plan, the Company purchased life insurance contracts on the lives of the
key officers and each director. The increase in cash surrender value of the
contracts, less the Company's cost of funds, constitutes the Company's
contribution to the plan each year. Plan participants are to be paid annual
benefits for a specified number of years commencing upon retirement. At
December 31, 2001, the cash surrender value of the insurance contracts was
approximately $4,583,000. The Company incurred no expense for benefits
relating to this plan during 2001.
A-35
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) 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 $33,484, $30,680 and $28,830, for
the years ended December 31, 2001, 2000, and 1999, respectively. The
following table sets forth the accumulated postretirement benefit
obligation as of December 31, 2001 and 2000, which represents the liability
for accrued postretirement benefit costs:
2001 2000
--------- --------
Accumulated postretirement benefit obligation $213,536 194,598
Unrecognized transition obligation (17,407) (34,819)
Unrecognized gain (loss) (38,048) (16,024)
--------- --------
Net liability recognized $158,081 143,755
========= ========
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 has no rights as a shareholder
with respect to the 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 approximately $43,000, $33,000 and $3,000
associated with the benefits of this plan in the years ended December 31,
2001, 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 vest over a five year period. Options granted in 2001 and
2000 vest over a three year period. All options expire after ten years. A
summary of the activity in the Plan is presented below:
2001 2000 1999
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
------- ------------- ------ ------------- ------ -------------
Outstanding, beginning of year 77,598 $ 14.00 27,657 $ 16.36 - $ -
Granted during the year 62,105 $ 15.86 49,941 $ 12.69 27,657 $ 16.36
------- ------------- ------ ------------- ------ -------------
Outstanding, end of year 139,703 $ 14.82 77,598 $ 14.00 27,657 $ 16.36
======= ============= ====== ============= ====== =============
Number of shares exercisable 27,709 5,530 -
======= ====== ======
The weighted average grant-date fair value of options granted in 2001, 2000
and 1999 was $10.40, $6.24, and $6.48, respectively. Options outstanding at
December 31, 2001 are exercisable at option prices ranging from $12.69 to
$16.36, as presented in the table above. Such options have a weighted
average remaining contractual life of approximately 9 years.
A-36
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) 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.
2001 2000 1999
----------- ---------- ---------
Net earnings As reported $4,575,352 5,378,470 4,541,945
Proforma $4,174,899 5,185,258 4,440,959
Net earnings per share As reported $ 1.42 1.67 1.55
Proforma $ 1.30 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 2001, 2000 and 1999, respectively - dividend
yield of 2.8%, 2.9% and 2.5%, respectively; risk free interest rate of 5%,
5% and 7%, respectively; 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 vest upon grant.
(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, 2001,
that Bancorp and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2001 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-37
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.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
----------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- -------- ------- ------- ------- -------
AS OF DECEMBER 31, 2001:
Total Capital (to Risk Weighted Assets)
Consolidated $66,254 12.27% 43,208 8.00% N/A N/A
Bank $64,841 12.03% 43,105 8.00% 53,881 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $60,163 11.14% 21,604 4.00% N/A N/A
Bank $58,750 10.90% 21,552 4.00% 32,328 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $60,163 10.46% 22,999 4.00% N/A N/A
Bank $58,750 10.24% 22,959 4.00% 28,699 5.00%
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%
(14) SHAREHOLDERS' EQUITY
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, 2001, this amount was
approximately $13,710,000.
A-38
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:
2001 2000 1999
-------- ------- -------
Telephone $332,569 379,801 353,536
Education and Consulting $159,720 164,750 366,488
Merchant Processing $551,513 502,085 459,682
(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 Available for Sale
--------------------------------------------
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.
Cash Surrender Value of Life Insurance
-------------------------------------------
Cash values of life insurance policies are carried at the value for
which such policies may be redeemed for cash.
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.
Trust Preferred Securities
----------------------------
Because the Company's trust preferred securities were issued at a
floating rate, the carrying amount is a reasonable estimate of fair
value.
A-39
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
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.
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, 2001 and 2000 are as follows:
2001 2000
--------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
(In thousands) (In thousands)
Assets:
Cash and cash equivalents $ 15,303 15,303 18,639 18,639
Investment securities available for sale $ 84,286 84,286 71,565 71,565
Other investments $ 4,603 4,603 2,399 2,399
Loans $ 484,517 493,611 406,226 402,239
Mortgage loans held for sale $ 5,339 5,339 1,564 1,564
Cash surrender value of life insurance $ 4,583 4,583 - -
Mortgage servicing rights $ 981 981 920 920
Liabilities:
Deposits and demand notes payable $ 490,341 493,421 451,673 467,512
FHLB advances $ 68,214 68,497 21,357 22,217
Trust preferred securities $ 14,000 14,000 - -
Unrecognized financial instruments:
Commitments to extend credit $ 91,822 91,822 89,407 89,407
Standby letters of credit $ 1,667 1,667 2,208 2,208
A-40
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) PEOPLES BANCORP OF NORTH CAROLINA, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
Assets
------
2001 2000
----------- ----------
Cash $ 228,202 152,939
Investment in subsidiaries 58,421,072 42,091,437
Other investments 815,000 815,000
Other assets 472,872 19,056
----------- ----------
$59,937,146 43,078,432
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Accrued expenses $ 103,043 39,413
Junior subordinated debentures 14,433,000 -
Shareholders' equity 45,401,103 43,039,019
----------- ----------
$59,937,146 43,078,432
=========== ==========
Statements of Earnings
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------- --------- ---------
Dividends from Bank $1,462,486 2,327,019 1,082,738
Expenses:
Interest 30,333 - -
Other operating expenses 311,117 191,519 -
---------- --------- ---------
Total expenses 341,450 191,519 -
---------- --------- ---------
Earnings before income tax benefit and equity in
undistributed earnings of subsidiaries 1,121,036 2,135,500 1,082,738
Income tax benefit 131,900 74,100 -
---------- --------- ---------
Earnings before equity in undistributed
earnings of subsidiaries 1,252,936 2,209,600 1,082,738
Equity in undistributed earnings of subsidiaries 3,322,416 3,168,870 3,459,207
---------- --------- ---------
Net earnings $4,575,352 5,378,470 4,541,945
========== ========= =========
A-41
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed
Financial Statements, continued
Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 4,575,352 5,378,470 4,541,945
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (3,322,416) (3,168,870) (3,459,207)
Provision for deferred taxes (28,076) (19,056) -
Change in:
Accrued expenses 63,630 39,413 5,871
------------- ----------- -----------
Net cash provided by operating activities 1,288,490 2,229,957 1,088,609
------------- ----------- -----------
Cash flows from investing activities:
Capital contributions to subsidiaries (13,933,000) - -
Purchase of other investments - (815,000) -
------------- ----------- -----------
Net cash used by investing activities (13,933,000) (815,000) -
------------- ----------- -----------
Cash flows from financing activities:
Proceeds from junior subordinated debentures 14,433,000 - -
Cash paid in lieu of fractional shares - (3,775) (5,871)
Dividends paid (1,287,486) (1,258,243) (1,082,738)
Transaction costs associated with trust preferred securities (425,741) - -
------------- ----------- -----------
Net cash provided (used) by financing activities 12,719,773 (1,262,018) (1,088,609)
------------- ----------- -----------
Net change in cash 75,263 152,939 -
Cash at beginning of year 152,939 - -
------------- ----------- -----------
Cash at end of year $ 228,202 152,939 -
============= =========== ===========
A-42
C O M M U N I T Y
[PICTURE OMITTED]
Peoples Bancorp
OF NORTH CAROLINA, INC.
2001 ANNUAL REPORT
C O M M U N I T Y
I N T R O D U C T I O N
The events of 2001 strengthened Peoples Bank's resolve to unite our corporate
objectives and core values with the needs of the communities we serve.
[PICTURE OMITTED]
TA B L E O F C O N T E N T S :
1 Introduction
2 President's Message
3 Financial Performance
5 Contributing to the Community
6 Executive Management of Peoples Bank
7 Eastern Catawba Region
8 Hickory Region & South Region
9 Banking Support
10 Real Estate Advisory Services & Peoples Investment Services
11 Financial Highlights
12 Selected Financial Data
13 Report of Independent Certified Public Accountants
14 Financials
16 Shareholder & General Information
17 Peoples Bank Board of Directors and Officers
18 Peoples Bancorp of North Carolina, Inc. Board of Directors and Officers
1
- --------------------------------------------------------------------------------
P R E S I D E N T ' S M E S S A G E
Without question, fiscal year 2001 was one of the most difficult and challenging
in many decades for Peoples Bancorp. Weak economic conditions, declining
interest rates, and the tragic events of September 11, 2001 contributed to
results for last year considered lackluster compared to expectations when 2001
began. The effects of our local and regional economy have negatively impacted
area businesses and individuals in a widespread manner.
Throughout 2001, we witnessed the effect of an economy in recession through the
closing or downsizing of business and industry. These events have resulted in a
regional unemployment rate that has advanced at a level ranking as the nation's
second highest rate of increase.
As a result of these adverse economic conditions, net income at Peoples Bancorp
declined 15% in comparison to our 2000 results. Although numerous
financial-related goals for 2001 were unattainable, net income for the year just
ended represented the second highest earnings level in the Company's history. I
encourage you to refer to the information contained in the financial section of
this report for more details.
Economists are currently reporting signs of recovery, which could lead toward an
end to one of our nation's shortest recessionary periods. Economic recovery,
however, is projected to occur over a prolonged period of time, and the rebound
is expected to be moderate.
In light of these forecasts, growth at Peoples Bancorp in terms of assets and
earnings should likewise be viewed as moderate for 2002. We project that such
growth will be more apparent in the later quarters of the year while we continue
to address the effects of current economic conditions during the first six
months.
Through all the challenges of these outside forces, I am pleased to report to
you that employees throughout our Company have responded with a firmer resolve
to re-channel energies in ways that will make a positive difference in the
communities we serve. We are successful in this quest because our employees
represent a very determined, diverse, and dynamic group of individuals who
believe in Peoples Bank and our mission. I am extremely proud of their
accomplishments.
Our strategic initiative to offer All Day Banking was introduced in January,
2002. This no-cost service provides our customers with the ability to present
all transactions until 5:00 P.M. each day and receive credit and/or processing
during the same business day. We feel this service has set us apart from our
competitors by providing our customers with three extra banking hours each day.
We also plan to continue our entry into two additional neighborhoods as we begin
construction on new banking offices in the West Lincoln community and on Catawba
Valley Boulevard in Hickory. We anticipate being operational in the West Lincoln
area on Highway 27 West in late 2002, while our Catawba Valley office will open
in early 2003.
In February 2002, the Board of Directors announced a stock repurchase program to
repurchase the Company's common stock. A total of $3 million has been allocated
for this purpose. The decision to repurchase reflected management's confidence
in the Company's future prospects and belief that the transaction would offer an
attractive opportunity to enhance shareholder value.
In closing, Peoples Bank is committed to be the financial services organization
that customers want to do business with, employees want to work for, and
shareholders want to invest in. I would also like to recognize and thank our
Board of Directors for their guidance, our talented management team for their
unwavering commitment, and all of our employees for meeting challenges that were
presented to us in 2001. Finally, thank you to our valued shareholders for your
continued support and your investment in Peoples Bancorp.
/s/ Tony W. Wolfe
Tony W. Wolfe
President and Chief Executive Officer
[PHOTO - 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 ]
2
BUILDING A SOLID FOUNDATION FOR RENEWED GROWTH.
FINANCIAL PERFORMANCE
- --------------------------------------------------------------------------------
In response to a faltering economy, the Federal Reserve took action on eleven
different occasions to reduce key interest rates for a total of 475 basis
points, or by 4.75% during the year. At Peoples Bancorp, these interest rate
cuts resulted in a reduction to the Bank's net interest income since deposit
rates do not reprice as quickly as rates on loans in our asset-sensitive balance
sheet. The Company's earnings for 2001 were further weakened due to a regional
economy characterized by rising unemployment and a general softening in area
businesses, leading to the charge-off of certain non-performing loans. Such
conditions led to a decline in reported net earnings for 2001 by 15% to
$4,575,352 when compared to results for the previous year. These results
translated to $1.42 basic and diluted net income per share. Net interest income
decreased 12% to $18,871,105 for the year ended December 31, 2001, when compared
to $21,427,183 for the same period one year ago due to declining interest rates
throughout 2001. After increasing the provision for loan losses to allow for the
charge-off of loans during fourth quarter, non-performing assets totaled $4.7
million at December 31, 2001, or .75% of total assets, compared to $6.1 million
at December 31, 2000, or 1.17% of total assets. The allowance for loan losses at
December 31, 2001, amounted to $6.1 million or 1.24% of total loans compared to
$4.7 million or 1.15% of total loans at December 31, 2000.
Non-interest income for 2001 amounted to $8,262,904 as compared to $3,915,764
for the previous year. This significant increase reflects an improvement in
mortgage banking income resulting from a strong demand of mortgage
[PICTURE OMITTED]
PEOPLES EMPLOYEES GENERATE FUNDS, IDEAS FOR LOCAL UNITED WAY AGENCIES
Peoples Bank's annual in-house United Way campaign topped last year's total by
25%, despite the area's economic downturn. Led by captains in every bank
department and branch, Peoples' employees staged events such as silent auctions,
food sales, dress down days, and even a pie-in-the-face contest. Together these
fund raisers generated 10% of employee contributions, while bringing together
people from every level of the Bank with customers from every branch and
community we serve. Funds generated by the campaign benefit the United Ways of
Catawba, Lincoln, and Alexander Counties, which support health and human service
agencies working to raise the quality of life in their respective communities.
3
loan services, gains realized on the sale of available-for-sale securities, and
fees arising from a new service provided to retail checking customers. The
increase in non-interest income was partially offset by an increase in
non-interest expense. Non-interest expense totaled $16,751,793 for the year
ended December 31, 2001, as compared to $15,508,977 for the previous year.
Despite deteriorating economic conditions during 2001, Peoples Bank continued to
experience strong balance sheet growth. Total assets as of December 31, 2001,
amounted to $619,504,704, an increase of 19% compared to total assets of
$519,001,787 at December 31, 2000. Loans increased 20% to $489,856,082 as of
December 31, 2001, compared to $407,789,800 as of December 31, 2000. Total
deposits amounted to $490,223,189 as of December 31, 2001, representing an
increase of 9% over deposits of $450,073,342 at December 31, 2000.
To enhance the Company's capital position, Peoples Bancorp completed the sale of
$14,000,000 PEBK Capital Trust I floating rate capital securities with a
maturity date of December 31, 2031. This transaction enabled the Company to end
the year as a "well-capitalized" financial institution as of December 31, 2001.
Shareholders received $.40 per share in cash dividends during 2001, which
amounted to $1,287,486. Total shareholders' equity grew 5.5% to $45,401,103.
Book value per share was $14.11 at December 31, 2001, as compared to $13.37 for
the previous year. Market value of Peoples Bancorp common stock closed at $14.35
per share on December 31, 2001 reflecting an increase in market value of 6.3%
for the year.
BOARD OF DIRECTORS
2001
[PHOTO - Standing from left to right:
James S. Abernethy, Bruce R. Eckard, Robert C. Abernethy, Chairman;
Larry E. Robinson, Tony W. Wolfe, President and Chief Executive Officer;
John H. Elmore, Jr., Gary E. Matthews, Dan Ray Timmerman, Sr., Fred L. Sherrill,
Jr., Charles F. Murray, B.E. Matthews, Director Emeritus; Benjamin I. Zachary ]
4
[PICTURE OMITTED]
C O N T R I B U T I N G T O T H E C O M M U N I T Y
EMPLOYEES GIVE THE RELAY FOR LIFE A RUN FOR THEIR MONEY.
Many Peoples Bank employees gave a night and day of their lives to pursue a cure
for cancer in the Relay For Life. Held overnight at area high school tracks, the
event brought together people from throughout the community to raise money and
awareness for the work of the Catawba, Lincoln, and Alexander County divisions
of the American Cancer Society. Employees from several Peoples branches joined
their neighbors in forming teams of 10 people who solicited pledges and spent
the night commemorating both those who have lost and won their battles against
cancer before running the relay the following day.
PEOPLES SUPPORTS THE NEWTON-CONOVER EDUCATION FOUNDATION.
An investment in education enriches the lives of everyone it touches within the
community. That is why Peoples Bank is proud to contribute to the continuing
development of one of our core communities through the work of the Newton-
Conover Education Foundation, a nonprofit organization which supports
educational excellence in Newton-Conover City Schools. Through the Foundation,
Peoples Bank shares the commitment of area businesses and individuals by
providing school readiness kits for incoming kindergarten students, scholarships
for students, grants for innovative teaching, supplemental funds to support
special classroom needs, and fund programs such as NC PRIDE (Promoting
Recognition for Individual Dedication to Excellence).
5
CORPORATE REALIGNMENT
PROVIDES NEW VISION
EXECUTIVE MANAGEMENT
- --------------------------------------------------------------------------------
O F P E O P L E S B A N K
Under the direction of Tony W. Wolfe, President and Chief Executive Officer, we
have completed the implementation of a corporate realignment strategy during
2001. This realignment will serve to strengthen the Company's management skills
and address future strategic initiatives. The restructuring at the corporate
level is designed to ensure that all facets of the Company's business units are
properly aligned. These dedicated individuals represent a unique blend of
banking talent that provide visionary leadership designed to move the Company
forward in the years ahead. Lance Sellers, Executive Vice President and Chief
Banking Officer directs all activities associated with lending, credit, and
branch administration. The attainment of exceptional customer service is of
paramount importance to both front-line and support personnel in this area as
they seek to consistently exceed customers' expectations.
Joe Beaman, Executive Vice President and Chief Administrative Officer will
continue to serve in the capacity of Corporate Secretary. As Chief
Administrative Officer, he will coordinate all activities surrounding Banking
Support including product development, human resources, marketing, training, and
community and shareholder relations. In today's competitive environment, these
roles operate in an atmosphere of heightened awareness as the Company seeks to
become more proactive in the design, training, and promotion of its products.
Bill Cable was promoted to Executive Vice President and Chief Operations Officer
where he has assumed responsibility for business systems, network systems, loan
and deposit operations, electronic banking, risk management, and the mail
center. These areas are represented by a group of talented employees who are
committed to providing the level of support that front-line staff and customers
depend upon for the efficient delivery of state-of-the-art technology and
services.
Joe Lampron joined Peoples Bank in the fall of 2001 as Executive Vice President
and Chief Financial Officer where he directs all corporate financial planning,
accounting practices, budgeting, asset-liability management, and treasury
functions. He is a Certified Public Accountant and has served previously as
Chief Financial Officer of another financial institution. Associates in the
finance department provide quality customer service through the timely and
accurate reporting both internally and externally.
EXECUTIVE MANAGEMENT TEAM
[PHOTO - From left to right;
Bill Cable, Tony Wolfe, Lance Sellers,
Joe Beaman, Joe Lampron ]
6
EASTERN CATAWBA REGION
JIM PERRY,
- --------------------------------------------------------------------------------
FIRST VICE PRESIDENT &
AREA EXECUTIVE
2001 was a very trying year for our Company, our area, and our entire country.
However, as we approach our 90th year of service to the citizens, organizations,
and businesses of Catawba and Alexander Counties, the Eastern Catawba Region of
Peoples Bank remains grateful and optimistic. From our origin in Catawba, North
Carolina, we have grown in strength and stability to become the dominant
community bank in our region. Like any other successful business, our ability to
deliver quality service has resulted from the combination of our loyal customers
and experienced staff.
We are proud of our continued growth and traditions, along with the success of
our customers and friends. However, we refuse to rest. The organization's goal
is not simply to deliver financial products and services, but to continually
strive toward our ultimate goal of providing exceptional customer service. To
ensure this result, the Board of Directors, management, and staff have
personally given of their time and energy in 2001, and will continue to do so in
2002 and beyond. The employees of Peoples Bank's Eastern Catawba Region are
actively involved in their communities, churches, schools and civic
organizations, including Relay For Life, United Way, and March of Dimes.
In 2001, the Eastern Catawba Region faced many challenges and witnessed many
changes. While our local economy stumbled, our Company and staff worked
consistently to provide financial stability and sound advice to our customers.
Early in the year, our staff assisted in the relocation efforts to our new
corporate headquarters. We were also proud to open our new Newton Office in
March of 2001. All of our offices in Newton, North Newton, Conover, Claremont,
Catawba, and Hiddenite welcomed new customers during 2001, and grew closer to
our existing customers as events unfolded here and abroad.
Clifton A. Wike, Senior Vice President is a 30-year veteran employee of Peoples
Bank, and Jim Perry, First Vice President and Area Executive for the Eastern
Catawba Region joined the Bank in 1999. Collectively, these individuals
represent 40 years of banking experience and have been instrumental in the
Bank's growth especially in this region. Management and staff of the Eastern
Catawba Region wish to express appreciation to our shareholders and customers
for your support in 2001 and express our desire and intent for a successful
2002.
EXCEPTIONAL CUSTOMER SERVICE BRINGS SUPPORT AND STABILITY TO EASTERN CATAWBA
REGION CUSTOMERS.
PEOPLES BANK RAISES DOLLARS AND AWARENESS FOR AREA MARCH OF DIMES.
In a year where world events made us all more conscious of the value of human
life, Peoples Bank once again demonstrated its commitment to protecting the most
precious lives of all - our children. The executives, employees, and customers
of Peoples Bank all came together to show their support for the March of Dimes,
which is dedicated to improving the health of babies. All funds raised go
directly to the March of Dimes of Catawba, Lincoln, and Alexander Counties,
which support community programs designed to reduce birth defects, infant
mortality, and low birth weight while promoting prenatal care.
AREA EXECUTIVES/
BUSINESS DEVELOPMENT LEADERS
[Photo: From left to right; Jim Perry, Danny Richard, Clifton Wike, Mark Sigmon,
Micah Lee]
7
HICKORY REGION
MICAH LEE,
- --------------------------------------------------------------------------------
FIRST VICE PRESIDENT & AREA EXECUTIVE
Peoples Bank entered the Hickory market in 1988 with the opening of our Springs
Road Office and became more visible in 1997 with the opening of the Viewmont
Office. Peoples Bank also operates an ATM on Catawba Valley Boulevard where our
third office in the Hickory Region is under construction and scheduled to open
in early 2003. This new office will further enhance Peoples Bank's visibility in
the Hickory market. The location of the Catawba Valley Boulevard Office, a high
traffic area that includes numerous retail establishments as well as new
apartment complexes and housing developments, will enable us to attract new
customers from both the Newton and the Hickory area. We look forward to
providing a full range of products and services to our customers in this
extension of our Hickory Region and continually strive to develop new
relationships in our community.
We are challenged in the Hickory market by significant banking competition from
both local and regional banks in close proximity to our existing branches.
Peoples Bank has been able to establish a strong reputation for lending in both
the commercial and residential construction arenas in the Hickory Region, and,
as such, attracts new customers and continues to grow. We feel this has been due
to our ability to provide high-quality banking service and competitive loan
structures with a personal, community bank touch. As our product mix grows, we
are confident that we will continue to expand existing relationships and attract
new ones to Peoples Bank.
We are also successful in this market because of our talented and dedicated
employees. They are well-trained and represent a total of combined banking
experience in excess of 100 years. Our employees are heavily involved in
community and civic organizations, youth programs, churches, and projects such
as Relay for Life, United Way, and March of Dimes.
We wish to use this opportunity to express appreciation to the Board of
Directors and management of Peoples Bank for recognizing the potential in this
strong and diverse market and for the confidence they have placed in us. We also
thank our shareholders and customers for their support.
NEW CUSTOMER RELATIONSHIPS EXPAND PEOPLES' INFLUENCE THROUGHOUT THE HICKORY
REGION.
SOUTH REGION
MARK SIGMON,
- --------------------------------------------------------------------------------
FIRST VICE PRESIDENT & AREA EXECUTIVE
Peoples Bank's entry into what is today known as the South Region was initiated
with the opening in 1985 of a full-service office in Maiden. The Denver Office
opened its doors for business in August of 1997 along the busy Highway 16
corridor. Since that time, the South Region has expanded with the opening of the
Triangle and Lincolnton Offices. Our newest location, the Lincolnton Office,
opened for business in January, 2001. Peoples Bank has experienced strong growth
in its loan and deposit base, and we are proud to participate in this process.
Expansion into the Denver, Lincolnton/Lincoln County market has represented a
successful strategy for Peoples Bank to date, and we look forward to additional
opportunities with the opening of an office in West Lincoln in the near future.
The South Region's success is a direct reflection of our dedicated and
well-trained staff. Our employees possess over 100 years of combined banking
experience, and they are dedicated to the service of their customers and the
community-at-large. Employees are involved in numerous worthy causes within the
communities where they live and work. They have chosen to volunteer their time
in many community-enrichment activities including Relay for Life, educational
and recreational projects, youth development, participation in city and county
governmental units, local churches, as well as other civic and public service
organizations. Our employees exemplify the commitment to be active participants
in the improvement of the quality of life in our market area.
On behalf of the South Region of Peoples Bank, we want to thank our customers,
staff, shareholders, and all who have assisted in the success of our
accomplishments. We especially wish to recognize Danny F. Richard, First Vice
President and Business Development Officer for his leadership in our Lincoln
County operations and for his role in helping our customers achieve their
financial goals.
THE SUCCESS OF PEOPLES BANK'S SOUTH REGION IS A DIRECT REFLECTION OF OUR
DEDICATED AND WELL-TRAINED STAFF.
8
BANKING SUPPORT
- --------------------------------------------------------------------------------
Employees throughout Peoples Bank represent a pool of talent that we feel is
extraordinary in the field of community banking. Our associates are our
Company's greatest assets. Therefore, in order to attract and retain banking
associates who reflect high-quality standards of commitment to our corporate
mission, it is necessary to review activities associated with the function of
human resources on a consistent basis. To this end, a review and realignment of
corporate benefits was conducted during 2001 to more appropriately meet the
needs of our employee base.
Kim Boyd, Senior Vice President, acknowledged that throughout the year Banking
Support representatives have focused on their initiative to identify, research,
and develop opportunities that generate added value for our customers and the
communities we serve. Administrative efforts during 2001 included the
introduction of an in-branch sales program designed to provide expanded
education regarding the Bank's full line of services while increasing sales
opportunities. Products and services which were introduced included Investment
Checking - a premium rate Now Account that allows unlimited check writing and
complimentary checks. I am pleased to report that volume projections were
exceeded following this product's first year of implementation. The
Tell-A-Friend Campaign has provided an opportunity for us to reward our
customers for engaging in relationship referrals for the Bank.
Our training department has been successful in offering on-line training in the
areas of compliance and skill-based applications. New efficiencies have been
discovered in this process since training can be accomplished in the branch
location, thereby allowing the employee to remain onsite. Complimenting our
training efforts has been the role that media advertising has played during the
year. "Growing Closer to Our Community" proved to be a successful platform for
many of our initiatives.
Eager and confident best describe our feeling upon entering 2002. Shifting
patterns indicate that our customer base will embrace alternative means with
which to conduct their banking business in the future. In anticipation of such
trends, we will introduce our new website which we invite you to visit at
www.peoplesbanknc.com. The site will provide access to Peoples Bank Online
Banking complete with a bill paying option. To further strengthen the Bank's
array of products and services, we will introduce a new account, Generations
Gold, which will enable us to partner with our account holders and communities
to "Live Better for Less". We anticipate marketing this product by mid-year
2002.
Managerial leadership and experienced, well-trained employees will lead us
forward and prepare us to embrace beneficial change for our customers as we
continue our quest in the discovery and implementation of value-added services
for our customers and shareholders. We look forward to new opportunities to make
a positive difference in the communities we serve.
BANKING SUPPORT IS DEDICATED TO THE DEVELOPMENT OF PRODUCTS AND SERVICES THAT
BRING ADDED VALUE TO OUR CUSTOMERS AND COMMUNITIES.
[PICTURE OMITTED]
KIM BOYD
SENIOR VICE PRESIDENT
BANKING SUPPORT
9
REAL ESTATE ADVISORY
- --------------------------------------------------------------------------------
SERVICES, INC.
A WHOLLY-OWNED SUBSIDIARY OF PEOPLES BANK
Real Estate Advisory Services, Inc. (REAS) operates as a real estate firm
specializing in real estate appraisals, consulting, and property management.
Under the leadership of David E. Reitzel, Senior Vice President of Peoples Bank
and Vice President of REAS, the primary objective for the subsidiary is to
provide quality real estate appraisals in a timely manner. Key factors in the
realization of this objective are seven employees representing 70 years of
expertise in real estate activities who understand the value of customer
response time and quality-oriented appraisals.
Our real estate subsidiary creates a value-added service to the Bank's mortgage
lending area through the use of specialized technology utilized in the appraisal
process. Enhanced appraisal technology has reduced traditional paper-based
processes thereby enabling our customers to experience a beneficial difference
in the time required to respond to their requests. Through our efforts to exceed
customer expectations and working in conjunction with an interest rate climate
conducive to home mortgage-related opportunities during 2001, REAS provided
increased contributions to non-interest income during the year. Future plans for
Real Estate Advisory Services include the REAS website and enhanced real estate
brokerage services.
In addition to providing leadership associated with appraisal and consulting
activities, David Reitzel also coordinates activities associated with our branch
infrastructure. His responsibilities include coordinating the current
construction of two banking offices located in the West Lincoln area and on
Catawba Valley Boulevard in Hickory. Occupancy is anticipated in late 2002 and
early 2003, respectively.
REAL ESTATE ADVISORY SERVICES GENERATES VALUABLE NEW REVENUE STREAMS FOR GROWTH.
[PICTURE OMITTED]
DAVID REITZEL
VICE PRESIDENT
REAL ESTATE ADVISORY
SERVICES, INC.
PEOPLES INVESTMENT
- --------------------------------------------------------------------------------
SERVICES, INC.
A WHOLLY-OWNED SUBSIDIARY OF PEOPLES BANK
Since 1996 Peoples Investment Services, Inc. has provided comprehensive
financial services for our clientele. David C. Brown, CFP, First Vice President
of Peoples Bank and Vice President of Peoples Investment Services, Inc. and his
experienced staff work closely with each customer to first understand their
needs and, secondly, to provide individual financial solutions that will help
them achieve their goals.
Our selection of services includes retirement planning, college planning,
investment planning, and estate planning. Through our relationship with Raymond
James Financial Services, Inc. we maintain access to a wide array of financial
services including mutual funds, annuities, IRA's, stocks, bonds, life
insurance, long term care insurance, trust services as well as retirement plan
services for businesses. You may learn more information about Peoples Investment
Services, Inc. at www.peoplesbanknc.com. Securities are offered exclusively
through Raymond James Financial Services, Inc., member NASD/SIPC, an independent
broker/dealer and are not insured by the FDIC or any other Bank insurance.
Investments are not deposits or obligations of the Bank, are not guaranteed by
the Bank, and are subject to risk, including the possible loss of principal.
[PICTURE OMITTED]
DAVID BROWN
VICE PRESIDENT
PEOPLES INVESTMENT
SERVICES, INC.
10
F I N A N C I A L H I G H L I G H T S
- --------------------------------------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2001 2000 Change
- -----------------------------------------------------------------------------------
Interest income $ 41,898 $ 40,859 3%
Interest expense 23,027 19,432 19%
- -----------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,326 19,548 -22%
Non-interest income 8,263 3,915 111%
Non-interest expense 16,752 15,509 8%
Income taxes 2,262 2,576 -12%
- -----------------------------------------------------------------------------------
Net income $ 4,575 $ 5,378 -15%
- -----------------------------------------------------------------------------------
Per Share*
Net Income $ 1.42 $ 1.67 -15%
Cash dividends 0.40 0.39 3%
Market price at December 31 14.35 13.50 6%
Book value at December 31 14.11 13.37 6%
- -----------------------------------------------------------------------------------
At Year-end
Loans $489,856 $407,790 20%
Available for sale securities 84,286 71,565 18%
Assets 619,505 519,002 19%
Deposits 490,223 450,073 9%
Shareholders' equity 45,401 43,039 5%
- -----------------------------------------------------------------------------------
Key Performance Ratios
Return on average assets 0.80% 1.15%
Return on average shareholders' equity 9.65% 12.55%
Dividend payout ratio 28.14% 23.39%
Average shareholders' equity to total average assets 8.25% 9.13%
- -----------------------------------------------------------------------------------
*Per share amounts have been restated to reflect a 10% stock dividend during
second quarter 2000.
11
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest income $ 41,898 40,859 32,302 29,215 23,783
Interest expense 23,027 19,432 14,790 14,540 11,179
- -----------------------------------------------------------------------------------------------------------------
Net interest income 18,871 21,427 17,512 14,675 12,604
Provision for loan losses 3,545 1,879 425 445 696
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 15,326 19,548 17,087 14,230 11,908
Non-interest income 8,263 3,915 3,380 3,646 2,060
Non-interest expense 16,752 15,509 13,832 12,020 10,413
- -----------------------------------------------------------------------------------------------------------------
Income before taxes 6,837 7,954 6,635 5,856 3,555
Income taxes 2,262 2,576 2,093 1,847 1,149
- -----------------------------------------------------------------------------------------------------------------
Net income $ 4,575 5,378 4,542 4,009 2,406
- -----------------------------------------------------------------------------------------------------------------
Selected Year-end Balances
Assets $ 619,505 519,002 432,435 402,273 326,853
Available for sale securities 84,286 71,565 62,498 63,228 53,307
Loans 489,856 407,790 336,959 306,748 238,449
Interest-earning assets 586,496 490,449 411,734 383,270 308,852
Deposits 490,223 450,073 376,634 350,067 275,393
Interest-bearing liabilities 515,989 420,594 339,243 315,387 258,685
Shareholders' equity $ 45,401 43,039 37,998 35,924 24,930
Shares outstanding* 3,218,714 3,218,714 3,218,950 3,219,150 2,808,300
- -----------------------------------------------------------------------------------------------------------------
Selected Average Balances
Assets $ 575,142 469,536 417,387 369,864 295,879
Available for sale securities 84,549 66,218 60,642 59,824 57,508
Loans 454,371 374,226 324,651 271,819 215,789
Interest-earning assets 545,945 447,645 396,606 351,730 281,215
Deposits 481,289 408,210 363,637 321,371 252,998
Interest-bearing liabilities 472,435 373,167 326,164 293,631 233,901
Shareholders' equity $ 47,432 42,852 39,348 33,303 24,117
Shares outstanding* 3,218,714 3,218,714 3,218,950 3,058,160 2,808,300
- -----------------------------------------------------------------------------------------------------------------
Profitability Ratios
Return on average total assets 0.80% 1.15% 1.09% 1.08% 0.81%
Return on average shareholders' equity 9.65% 12.55% 11.54% 12.04% 9.98%
Dividend payout ratio 28.14% 23.39% 23.84% 22.61% 33.18%
- -----------------------------------------------------------------------------------------------------------------
Liquidity and Capital Ratios (averages)
Loan to deposit 94.41% 91.67% 89.28% 84.58% 85.29%
Shareholders' equity to total assets 8.25% 9.13% 9.43% 9.00% 8.15%
- -----------------------------------------------------------------------------------------------------------------
Per Share of Common Stock*
Net income $ 1.42 1.67 1.41 1.31 0.86
Cash dividends $ 0.40 0.39 0.34 0.28 0.28
Book value $ 14.11 13.37 11.81 11.16 8.88
- -----------------------------------------------------------------------------------------------------------------
*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.
12
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, 2001 and 2000, 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,
2001. Such consolidated financial statements and our report thereon dated
January 18, 2002, expressing an unqualified opinion (which are not included
herein), are included in the proxy statement for the 2002 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, 2001 and
2000 and the related consolidated statements of earnings for each of the three
years in the period ended December 31, 2001, 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 18, 2002
13
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 2001 AND 2000
Assets
------
2001 2000
------------ -----------
Cash and due from banks $ 13,042,320 13,619,197
Federal funds sold 2,261,000 5,020,000
------------ -----------
Cash and cash equivalents 15,303,320 18,639,197
Investment securities available for sale 84,286,037 71,564,844
Other investments 4,602,773 2,398,873
Mortgage loans held for sale 5,338,931 1,563,700
Loans, net 484,517,151 406,226,100
Premises and equipment, net 14,679,191 12,907,968
Cash surrender value of life insurance 4,583,000 -
Accrued interest receivable and other assets 6,194,301 5,701,105
------------ -----------
Total assets $619,504,704 519,001,787
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 56,826,130 52,793,390
Interest-bearing 433,397,059 397,279,952
------------ -----------
Total deposits 490,223,189 450,073,342
Demand notes payable to U. S. Treasury 117,987 1,600,000
Accrued interest payable and other liabilities 1,548,139 2,932,284
Federal Home Loan Bank advances 68,214,286 21,357,142
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (Trust Preferred Securities) 14,000,000 -
------------ -----------
Total liabilities 574,103,601 475,962,768
------------ -----------
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;
3,218,714 shares issued and outstanding 36,407,798 36,407,798
Retained earnings 9,915,399 6,627,533
Accumulated other comprehensive income (loss) (922,094) 3,688
------------ -----------
Total shareholders' equity 45,401,103 43,039,019
------------ -----------
Total liabilities and shareholders' equity $619,504,704 519,001,787
============ ===========
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy
Statement, dated April 3, 2002, for a complete set of Consolidated Financial
Statements.
14
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
Interest income:
Interest and fees on loans $36,512,395 36,423,973 28,375,391
Interest on federal funds sold 126,791 281,659 338,941
Interest and dividends on securities:
U. S. Treasuries - 16,572 50,221
U. S. Government agencies 3,918,551 2,977,459 2,297,645
State and political subdivisions 911,707 988,020 973,744
Other 428,157 171,600 266,097
----------- ----------- -----------
Total interest income 41,897,601 40,859,283 32,302,039
----------- ----------- -----------
Interest expense:
Deposits 20,790,136 18,326,359 14,009,018
Federal Home Loan Bank advances 2,118,511 974,036 735,752
Other 117,849 131,705 45,501
----------- ----------- -----------
Total interest expense 23,026,496 19,432,100 14,790,271
----------- ----------- -----------
Net interest income 18,871,105 21,427,183 17,511,768
Provision for loan losses 3,545,322 1,879,100 425,000
----------- ----------- -----------
Net interest income after provision for loan losses 15,325,783 19,548,083 17,086,768
----------- ----------- -----------
Other income:
Service charges on deposit accounts 2,805,492 1,588,390 1,326,810
Other service charges and fees 471,998 367,352 298,454
Gain (loss) on sale of securities 1,613,992 (483,472) (34,824)
Mortgage banking income 1,014,043 241,007 740,031
Insurance and brokerage commissions 348,582 168,557 129,786
Miscellaneous 2,008,797 2,033,930 919,804
----------- ----------- -----------
Total other income 8,262,904 3,915,764 3,380,061
----------- ----------- -----------
Other expenses:
Salaries and employee benefits 9,115,496 8,899,285 7,737,404
Occupancy 2,984,100 2,509,720 2,230,448
Other operating 4,652,197 4,099,972 3,863,652
----------- ----------- -----------
Total other expenses 16,751,793 15,508,977 13,831,504
----------- ----------- -----------
Earnings before income taxes 6,836,894 7,954,870 6,635,325
Income tax expense 2,261,542 2,576,400 2,093,380
----------- ----------- -----------
Net earnings $ 4,575,352 5,378,470 4,541,945
----------- ----------- -----------
Net earnings per share $ 1.42 1.67 1.41
----------- ----------- -----------
Refer to Appendix A to the Peoples Bancorp of North Carolina, Inc. Proxy
Statement, dated April 3, 2002, for a complete set of Consolidated Financial
Statements.
15
SHAREHOLDER & GENERAL INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of Peoples Bancorp will be held at 11:00 am,
on Thursday, May 2, 2002, 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 by Scott & Stringfellow, Inc.,
Ryan, Beck & Company, and Trident Securities, Inc.
[GRAPHIC OMITTED]
DIVIDEND REINVESTMENT & STOCK PURCHASE
Peoples Bancorp offers a Dividend Reinvestment and Stock Purchase Plan 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 banking law.
As of March 1, 2002, the Company had 670 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
Please visit Peoples Bank at their website:
www.peoplesbanknc.com
16
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.
Gary E. Matthews
President
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
DIRECTOR EMERITUS
B. E. Matthews
Chief Executive Officer
Matthews Construction Company, Inc.
PEOPLES BANK
OFFICERS
Tony W. Wolfe*
President and
Chief Executive Officer
Joseph F. Beaman, Jr.*
Executive Vice President,
Chief Administrative Officer, and
Corporate Secretary
A. Joseph Lampron*
Executive Vice President
Chief Financial Officer
Lance A. Sellers*
Executive Vice President
Chief Banking Officer
William D. Cable*
Executive Vice President
Chief Operations Officer
Kimberly L. Boyd
Senior Vice President
Banking Support
David E. Reitzel
Senior Vice President
Real Estate Administration
Clifton A. Wike
Senior Vice President
Senior Lender
Kimberly D. Bazzle
First Vice President
Marketing and Training
Brenda B. Beam
First Vice President
Human Resources
David C. Brown
First Vice President
Certified Financial Planner
Steven F. Cloninger
First Vice President
Credit Administration
George S. Earp
First Vice President
Finance
S. Micah Lee
First Vice President
Area Executive
V. Dean Norman
First Vice President
Network Systems
James O. Perry
First Vice President
Area Executive
Daniel F. Richard
First Vice President
Business Development Officer
Kyle E. Sigmon
First Vice President
Mortgage Loans
Mark W. Sigmon
First Vice President
Area Executive
Brenda L. Terrell
First Vice President
Application Operations Manager
Nancy A. Anderson
Vice President
Mortgage Loan Originator
Patsy D. Black
Vice President
Branch Manager,
Triangle Crossing
Kay F. Deal
Vice President
Branch Manager, Conover
John R. Duncan, Jr.
Vice President
Problem Asset Manager
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
Leslie R. Howard
Vice President
Branch Manager, Denver
N. Michael Hamra
Vice President
Risk Management
M. Beth LaBarbera
Vice President
Branch Manager, Springs Road
E. Dean Lawing
Vice President
Mortgage Loan Underwriter
Tommy C. McNeely
Vice President
Business Development Officer
Cynthia H. McRee
Vice President
Branch Manager, Maiden
Rick D. Moser
Vice President
Branch Manager, Viewmont
Tammy H. Pope
Vice President
Business Systems
Denelda S. Reese
Vice President
Branch Manager, Catawba and
Claremont
Jeanette R. Ringley
Vice President
Branch Manager, Newton
*Designates an executive officer of the Bank
17
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.
Gary E. Matthews
President
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
DIRECTOR EMERITUS
B. E. Matthews
Chief Executive Officer
Matthews Construction Company, Inc.
PEOPLES BANCORP
OFFICERS
Tony W. Wolfe
President and Chief Executive Officer
Joseph F. Beaman, Jr.
Executive Vice President and
Corporate Secretary
A. Joseph Lampron
Executive Vice President, Chief Financial
Officer and Corporate Treasurer
Lance A. Sellers
Executive Vice President and
Assistant Corporate Secretary
William D. Cable
Executive Vice President and
Assistant Corporate Treasurer
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
David C. Brown
Vice President and
Assistant Secretary
Joseph F. Beaman, Jr.
Secretary and Treasurer
REAL ESTATE ADVISORY
SERVICES, INC.
BOARD OF DIRECTORS
Robert C. Abernethy
Dan Ray Timmerman, Sr.
Tony W. Wolfe
OFFICERS
Tony W. Wolfe
President
Christopher L. Brookshire
Vice President
David E. Reitzel
Vice President
Joseph F. Beaman, Jr.
Treasurer
Clifton A. Wike
Secretary
Kyle E. Sigmon
Assistant Secretary
18
PEOPLES BANCORP
BANK LOCATIONS NORTH CAROLINA, INC.
- --------------------------------------------------------------------------------
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 28037
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
Future Locations
Catawba Valley Boulevard
2052 Catawba Valley Blvd SE
Hickory, NC 28602
West Lincoln
Highway 27 West
Lincolnton, NC 28092
www.peoplesbanknc.com
[GRAPHIC OMITTED]
REVOCABLE PROXY
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PLEASE MARK VOTES
AS IN THIS EXAMPLE
Annual Meeting of Shareholders
May 2, 2002 - 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 2002 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 2, 2002 at
11:00 A.M., Eastern Time, and at any adjournments or postponements thereof.
1. The approval of the election of the
following named directors:
John H. Elmore, Jr., Charles F. Murray and Fred L. Sherrill, Jr. will serve as
directors until the 2005 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.
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,
2002.
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, 2002, 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.
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, 2002, 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, 2002 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