UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 000-27205
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2132396
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658
---------------------- -----
(Address of principal executive office) (Zip Code)
(828) 464-5620
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,145,547 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AT AUGUST 13, 2002.
- --------------------------------------------------------------------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Earnings for the three months ended June 30, 2002
and June 30, 2001 (Unaudited), and for the six months ended June 30, 2002 and
June 30, 2001 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the three months ended
June 30, 2002 and June 30, 2001 (Unaudited), and for the six months ended June
30, 2002 and June 30, 2001 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and June 30, 2001 (Unaudited) 6-7
Notes to Consolidated Financial Statements (Unaudited) 8-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
This Form 10-Q contains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
changes in interest rate environment, management's business strategy, national,
regional, and local market conditions and legislative and regulatory conditions.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 2002 2001
------ ------------ -------------
(Unaudited)
Cash and due from banks $ 14,053,853 13,042,320
Federal funds sold 4,447,000 2,261,000
------------ -------------
Cash and cash equivalents 18,500,853 15,303,320
Investment securities available for sale 76,269,797 84,286,037
Other investments 4,902,773 4,602,773
------------ -------------
Total securities 81,172,570 88,888,810
Mortgage loans held for sale 2,089,370 5,338,931
Loans, net 498,826,461 484,517,151
Premises and equipment, net 15,144,879 14,679,191
Cash surrender value of life insurance 4,705,854 4,583,000
Accrued interest receivable and other assets 6,048,149 6,194,301
------------ -------------
Total assets $626,488,136 619,504,704
============ =============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Non-interest bearing demand $ 66,190,262 56,826,130
NOW, MMDA & savings 159,679,710 145,591,866
Time, $100,000 or more 159,160,964 156,034,091
Other time 119,924,899 131,771,102
------------ -------------
Total deposits 504,955,835 490,223,189
Demand notes payable to U.S. Treasury 1,488,467 117,987
FHLB borrowings 58,142,857 68,214,286
Trust preferred securities 14,000,000 14,000,000
Accrued interest payable and other liabilities 1,800,265 1,548,139
------------ -------------
Total liabilities 580,387,424 574,103,601
------------ -------------
Shareholders' equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued
and outstanding - -
Common stock, no par value; authorized
20,000,000 shares; issued and
outstanding 3,145,547 shares in 2002
and 3,218,714 shares in 2001 35,265,773 36,407,798
Retained earnings 10,818,692 9,915,399
Accumulated other comprehensive income 16,247 (922,094)
------------ -------------
Total shareholders' equity 46,100,712 45,401,103
------------ -------------
Total liabilities and shareholders' equity $626,488,136 619,504,704
============ =============
See accompanying notes to consolidated financial statements.
3
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------- ------------- ------------- -------------
Interest Income:
Interest and fees on loans $ 7,939,039 9,419,539 15,754,574 19,216,430
Interest on federal funds sold 13,100 8,584 23,848 40,260
Interest on investment securities:
U.S. Government agencies 908,465 1,062,779 1,873,572 1,857,370
States and political subdivisions 153,602 239,906 329,634 487,328
Other 125,266 118,035 246,998 182,181
-------------- ------------- ------------- -------------
Total interest income 9,139,472 10,848,843 18,228,626 21,783,569
-------------- ------------- ------------- -------------
Interest expense:
NOW, MMDA & savings deposits 538,993 742,601 1,049,346 1,615,476
Time deposits 2,749,898 4,683,006 5,968,764 9,375,380
FHLB borrowings 652,023 525,484 1,336,932 842,898
Trust preferred securities 183,750 367,500
Other 2,494 46,804 12,128 68,708
-------------- ------------- ------------- -------------
Total interest expense 4,127,158 5,997,894 8,734,670 11,902,462
-------------- ------------- ------------- -------------
Net interest income 5,012,314 4,850,949 9,493,956 9,881,107
Provision for loan losses 1,266,100 452,700 1,766,100 882,200
-------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 3,746,214 4,398,249 7,727,856 8,998,907
-------------- ------------- ------------- -------------
Other income:
Service charges 748,987 727,013 1,409,483 1,336,974
Other service charges and fees 89,984 103,380 232,823 231,754
Gain (loss) on sale of securities - 203,463 - 194,727
Mortgage banking income 169,913 250,848 399,867 455,674
Insurance and brokerage commissions 125,637 109,625 221,869 164,668
Miscellaneous 271,257 595,993 665,680 1,208,424
-------------- ------------- ------------- -------------
Total other income 1,405,778 1,990,322 2,929,722 3,592,221
-------------- ------------- ------------- -------------
Other expense:
Salaries and employee benefits 2,416,871 2,389,034 4,853,873 4,836,998
Occupancy 753,730 767,682 1,513,073 1,462,482
Other 1,022,692 1,213,421 2,041,057 2,230,397
-------------- ------------- ------------- -------------
Total other expenses 4,193,293 4,370,137 8,408,003 8,529,877
-------------- ------------- ------------- -------------
Earnings before income taxes 958,699 2,018,434 2,249,575 4,061,251
Income taxes 312,400 668,000 717,400 1,339,800
-------------- ------------- ------------- -------------
Net earnings $ 646,299 1,350,434 1,532,175 2,721,451
============== ============= ============= =============
Basic earnings per share $ 0.21 0.42 0.48 0.85
============== ============= ============= =============
Diluted earnings per share $ 0.20 0.42 0.48 0.84
============== ============= ============= =============
Cash dividends declared per share $ 0.10 0.10 0.20 0.20
============== ============= ============= =============
See accompanying notes to consolidated financial statements.
4
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------- -------------- ------------- --------------
Net earnings $ 646,299 1,350,434 1,532,175 2,721,451
-------------- -------------- ------------- --------------
Other comprehensive income, net
of tax:
Unrealized gains (losses) on
investment securities, net of
taxes of $597,494,
$(51,672), $520,762
and $372,574,
respectively 936,510 (80,991) 816,241 583,971
Unrealized gain on derivative
financial instruments
qualifying as cash flow
hedges, net of tax of
$77,900 122,100 - 122,100 -
Reclassification
adjustment for (gains)
losses included in net
earnings, net of taxes of
$0, $(79,249), $0 and
$(75,846), respectively - (124,214) - (118,881)
-------------- -------------- ------------- --------------
Other comprehensive income 1,058,610 (205,205) 938,341 465,090
-------------- -------------- ------------- --------------
Comprehensive income $ 1,704,909 1,145,229 2,470,516 3,186,541
============== ============== ============= ==============
See accompanying notes to consolidated financial statements.
5
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2002 and 2001
2002 2001
------------- ------------
Cash flows from operating activities:
Net earnings $ 1,532,175 2,721,451
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion 714,907 733,913
Provision for loan losses 1,766,100 882,200
Gain on sale of investment securities - (194,727)
Gain on sale of mortgage loans (17,578) (10,000)
Gain on sale of premises and equipment - (2,818)
Loss (gain) on sale of other real estate (12,290) 4,419
Increase in cash value life insurance (122,854) -
Change in:
Other assets (258,185) 429,831
Other liabilities 252,126 (624,624)
Mortgage loans held for sale 3,267,139 (2,476,917)
------------- ------------
Net cash provided by operating activities 7,121,540 1,462,728
------------- ------------
Cash flows from investing activities:
Purchases of investment securities available-for-sale (500,000) (50,837,358)
Proceeds from calls and maturities of investment securities
available for sale 9,846,591 10,437,830
Proceeds from sales of investment securities available for sale - 17,604,375
Purchase of other investments (300,000) (1,457,401)
Net change in loans (16,271,886) (42,833,115)
Purchase of premises and equipment (1,110,088) (5,188,991)
Proceeds from sale of premises and equipment 3,950 2,470,180
Proceeds from sale of other real estate 183,173 12,731
------------- ------------
Net cash used in investing activities (8,148,260) (69,791,749)
------------- ------------
Cash flows from financing activities:
Net change in deposits 14,732,646 37,345,115
Net change in demand notes payable to U.S. Treasury 1,370,480 -
Net proceeds (repayments of) FHLB borrowings (10,071,429) 31,928,572
Transaction costs associated with trust preferred securities (36,537) -
Common stock repurchased (1,146,250) -
Proceeds from exercise of options 4,225 -
Cash dividends (628,882) (643,743)
------------- ------------
Net cash provided by financing activities 4,224,253 68,629,944
------------- ------------
Net change in cash and cash equivalents 3,197,533 300,923
Cash and cash equivalents at beginning of period 15,303,320 18,639,197
------------- ------------
Cash and cash equivalents at end of period $ 18,500,853 18,940,120
============= ============
6
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2002 and 2001
(Continued)
2002 2001
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $8,931,807 11,936,405
Income taxes $ 844,000 1,740,593
Noncash investing and financing activities:
Change in net unrealized gain (loss) on investment securities
available for sale and derivative financial instruments, net of tax $1,058,610 465,090
Transfer of loans to other real estate $ 196,476 195,000
See accompanying notes to consolidated financial statements.
7
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1) Summary of Significant Accounting Policies
---------------------------------------------
The consolidated financial statements include the financial statements of
Peoples Bancorp of North Carolina, Inc. and its wholly owned 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.
The Company's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. Many of the Company's accounting policies require significant
judgment regarding valuation of assets and liabilities and/or significant
interpretation of the specific accounting guidance. A description of the
Company's significant accounting policies can be found in Note 1 of the
Notes to Consolidated Financial Statements in the Company's 2002 Annual
Report to Shareholders which is Appendix A to the Proxy Statement for the
May 2, 2002 Annual Meeting of Shareholders. The following is a summary of
the more judgmental and complex accounting policies of the Company.
Many of the Company's assets and liabilities are recorded using various
valuation techniques that require significant judgment as to
recoverability. The collectability of loans is reflected through the
Company's estimate of the allowance for loan losses. The Company performs
periodic and systematic detailed reviews of its lending portfolio to assess
overall collectability. In addition, certain assets and liabilities are
reflected at their estimated fair value in the consolidated financial
statements. Such amounts are based on either quoted market prices or
estimated values derived by the Company utilizing dealer quotes or market
comparisons.
There are other complex accounting standards that require the Company to
employ significant judgment in interpreting and applying certain of the
principles prescribed by those standards. These judgments include, but are
not limited to, the determination of whether a financial instrument or
other contract meets the definition of a derivative in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), and the
applicable hedge deferral criteria and the accounting for the transfer of
financial assets and extinguishments of liabilities in accordance with the
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 140).
The consolidated financial statements in this report are unaudited. In the
opinion of management, all adjustments (none of which were other than
normal accruals) necessary for a fair presentation of the financial
position and results of operations for the periods presented have been
included.
Management of the Company has made a number of estimates and assumptions
relating to reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(2) Allowance for Loan Losses
----------------------------
The following is an analysis of the allowance for loan losses for the six
months ended June 30, 2002 and 2000:
2002 2001
------------ ------------
Balance, beginning of period $6,090,570 4,713,227
Provision for loan losses 1,766,100 882,200
Less:
Charge-offs (818,000) (243,359)
Recoveries 78,481 132,105
------------ ------------
Net charge-offs (739,519) (111,254)
------------ ------------
Balance, end of period $7,117,151 5,484,173
=========== ==========
8
(3) Net Earnings Per Share
-------------------------
Net earnings per common share is based on the weighted average number of
common shares outstanding during the period while the effects of potential
common shares outstanding during the period are included in diluted
earnings per share. The average market price during the year is used to
compute equivalent shares.
The reconciliation of the amounts used in the computation of both "basic
earnings per share" and "diluted earnings per share" for the three months
and six months ended June 30, 2002 is as follows:
For the three months ended June 30, 2002
----------------------------------------
Per Share
Net Earnings Common Shares Amount
------------ ------------- ----------
Basic earnings per share $ 646,299 3,145,547 $ 0.21
=======
Effect of dilutive securities:
Stock options - 13,802
------------ -------------
Diluted earnings per share $ 646,299 3,159,349 $ 0.20
============ ============= =======
For the six months ended June 30, 2002
--------------------------------------
Per Share
Net Earnings Common Shares Amount
------------ ------------- ----------
Basic earnings per share $ 1,532,175 3,165,780 $ 0.48
=======
Effect of dilutive securities:
Stock options - 10,405
------------ -------------
Diluted earnings per share $ 1,532,175 3,176,185 $ 0.48
============ ============= =======
The reconciliation of the amounts used in the computation of both "basic
earnings per share" and "diluted earnings per share" for the three months
and six months ended June 30, 2001 is as follows:
For the three months ended June 30, 2001
----------------------------------------
Per Share
Net Earnings Common Shares Amount
------------ ------------- ----------
Basic earnings per share $ 1,350,434 3,218,714 $ 0.42
=======
Effect of dilutive securities:
Stock options - 7,120
------------ -------------
Diluted earnings per share $ 1,350,434 3,225,834 $ 0.42
============ ============= =======
For the six months ended June 30, 2001
--------------------------------------
Per Share
Net Earnings Common Shares Amount
------------ ------------- ----------
Basic earnings per share $ 2,721,451 3,218,714 $ 0.85
=======
Effect of dilutive securities:
Stock options - 6,885
------------ -------------
Diluted earnings per share $ 2,721,451 3,225,599 $ 0.85
============ ============= =======
9
(4) Derivative Instruments and Hedging Activities
-------------------------------------------------
In the normal course of business, the Company enters into derivative
contracts to manage interest rate risk by modifying the characteristics of
the related balance sheet instruments in order to reduce the adverse effect
of changes in interest rates. All derivative financial instruments are
recorded at fair value in the financial statements.
On the date a derivative contract is entered into, the Company designates
the derivative as a fair value hedge, a cash flow hedge, or a trading
instrument. Changes in the fair value of instruments used as fair value
hedges are accounted for in the earnings of the period simultaneous with
accounting for the fair value change of the item being hedged. Changes in
the fair value of the effective portion of cash flow hedges are accounted
for in other comprehensive income rather than earnings. Changes in fair
value of instruments that are not intended as a hedge are accounted for in
the earnings of the period of the change.
The Company formally documents all hedging relationships, including an
assessment that the derivative instruments are expected to be highly
effective in offsetting the changes in fair values or cash flows of the
hedged items.
As of June 30, 2002, the Company had cash flow hedges with a notional
amount of $40 million. These derivative instruments consisted of an
interest rate swap agreement that was used to convert floating rate loans
to fixed rate for a period of two years ending in June 2004. Interest rate
swap agreements generally involve the exchange of fixed and variable rate
interest payments between two parties, based on a common notional principal
amount and maturity date. The terms of the swaps are determined based on
management's assessment of future interest rates and other factors. The
Company recorded an asset of $200,000 for the fair value of these cash flow
hedges resulting in an after-tax increase in other comprehensive income of
$122,100. As of June 30, 2002, no ineffectiveness was recorded in earnings.
Additionally, on July 2, 2002, the Company entered into an interest rate
swap agreement with a notional amount of $20 million to be accounted for as
a cash flow hedge. This hedge transaction had no effect on the financial
statements of the Company as of June 30, 2002.
(5) Commitments and Contingencies
-------------------------------
The Company is 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. At June 30, 2002, the
contractual amounts of the Company's commitments to extend credit and
standby letters of credit were $98.6 million and $2.2 million,
respectively.
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 and because they may
expire without being drawn upon, the total commitment amount of $98.6
million does not necessarily represent future cash requirements. 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.
The Company has an overall interest rate-risk management strategy that
incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate
volatility. By using derivative instruments, the Company is exposed to
credit and market risk. If the counterparty fails to perform, credit risk
is equal to the extent of the fair-value gain in the derivative. The
Company minimizes the credit risk in derivative instruments by entering
into transactions with high-quality counterparties that are reviewed
periodically by the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary. Net earnings for the second quarter of 2002 were $646,000, a
decrease of $704,000 or 52% from the $1.4 million earned in the same period in
2001. Basic earnings per share for the quarter ended June 30, 2002 decreased to
$0.21 from $0.42 in the comparable period of 2001. Diluted earnings per share
for the three months ended June 30, 2002 and 2001 were $0.20 and $0.42,
respectively. This decrease is primarily attributable to a decrease in
non-interest income and an increase in the provision for loan losses. The
annualized return on average assets was 0.42% for the three months ended June
30, 2002 compared to 0.95% for the same period in 2001, and annualized return on
average shareholders' equity was 5.67% for the three months ended June 30, 2002
compared to 11.79% for the same period in 2001.
Net earnings for the six months ended June 30, 2002 were $1.5 million, a
decrease of 44% from the $2.7 million earned in the first six months of 2001.
Basic earnings per share for this period decreased to $0.48 from $0.85 for the
six months ended June 30, 2001. Diluted earnings per share for the six months
ended June 30, 2002 and 2001 were $0.48 and $0.84, respectively. This decrease
was primarily due to decreases in net interest income and non-interest income
and an increase in the provision for loan losses. Annualized return on average
assets was 0.49% for the first six months of 2002 compared to 0.99% for the same
period in 2001, and annualized return on average shareholders' equity was 6.63%
versus 11.85%, respectively.
Net Interest Income. Net interest income, the major component of the
Company's net income, was $5.0 million for the three months ended June 30, 2002
an increase of 3% over the $4.9 million earned in the same period in 2001. The
increase in 2002 second quarter net interest income was primarily attributable
to a decrease in the cost of funds.
Interest income decreased $1.7 million or 16% for the three months ended
June 30, 2002 compared with the same period in 2001. The decrease was due to a
decrease in the yield on earning assets, which is primarily attributable to
reductions in the prime commercial lending rate of Peoples Bank (the "Bank").
Interest expense decreased $1.9 million or 31% for the three months ended
June 30, 2002 compared with the same period in 2001. The decrease in interest
expense was due to a decrease in the cost of funds to 3.22% for the three months
ended June 30, 2002 from 5.15% for the same period in 2001, partially offset by
an increase in volume of interest bearing liabilities. The decrease in the cost
of funds is primarily attributable to a decrease in the average rate paid on
certificates of deposit to 3.87% for the three months ended June 30, 2002 from
6.25% for the same period one year ago.
Net interest income for the six month period ended June 30, 2002 was $9.5
million, a decrease of 4% from net interest income of $9.9 million for the six
months ended June 30, 2001. The decrease was primarily attributable to the
decline in interest rates.
Interest income decreased $3.6 million or 16% to $18.2 million for the six
months ended June 30, 2002 compared to $21.8 million for the same period in
2001. The decrease was due to a decrease in the yield on earning assets, which
is primarily attributable to decreases in the Bank's prime commercial lending
rate. Average loans increased 15% to $500.9 million, while average investment
securities available for sale increased 2% to $81.2 million in the six months
ended June 30, 2002 compared to the same period in 2001. All other
interest-earning assets including federal funds sold increased to an average of
$7.7 million in the six months ended June 30, 2002 from $4.5 million in the same
period in 2001. The tax equivalent yield on average earning assets decreased to
6.29% for the six months ended June 30, 2002 from 8.56% for the six months ended
June 30, 2001.
Interest expense decreased 27% to $8.7 million for the six months ended
June 30, 2002 compared to $11.9 million for the corresponding period in 2001.
The decrease in interest expense was due to a decrease in the average rate paid
11
on interest bearing liabilities to 3.42% for the six months ended June 30, 2002
from 5.35% for the same period in 2001, partially offset by an increase in
volume of interest bearing liabilities. The decrease in the cost of funds is
primarily attributable to a decrease in the average rate paid on certificates of
deposit to 4.21% for the six months ended June 30, 2002 from 6.41% for the same
period in 2001.
Provision for Loan Losses. For the three months ended June 30, 2002 a
contribution of $1.3 million was made to the provision for loan losses compared
to $453,000 for the three months ended June 30, 2001. For the six months ended
June 30, 2002 a contribution of $1.8 million was made to the provision for loan
losses compared to $882,000 for loan losses for the six months ended June 30,
2001. The increase in the provision for loan losses reflects an increase in
non-performing assets resulting from a downturn in the local economy.
Non-Interest Income. Total non-interest income was $1.4 million in the
second quarter of 2002, a decrease of 29% from the $2.0 million earned in the
second quarter of 2001. This decrease reflects reductions in miscellaneous
income and gains on sales of securities. Miscellaneous income decreased 54% to
$271,000 for the three months ended June 30, 2002. The decrease in miscellaneous
income is partially attributable to a reduction in merchant processing income,
resulting from the sale of merchant credit card processing services during
second quarter 2002. During the second quarter of 2001, miscellaneous income
included an increase in value of an interest rate floor contract. The Company
had no realized gains or losses associated with derivative financial instruments
for the three months ended June 30, 2002. During the second quarter of 2002,
there were no gains or losses from the sale of securities; during the second
quarter of 2001, there was a $203,000 gain on sale of securities.
Total non-interest income was $2.9 million for the six months ended June
30, 2002, a decrease of 18% from the $3.6 million earned in the same period of
2001. This decrease reflects reductions in miscellaneous income and gains on
sales of securities, which were partially offset by an increase in service
charges. Miscellaneous income decreased 45% for the six months ended June 30,
2002. The decrease in miscellaneous income is partially attributable to a
reduction in merchant processing income, resulting from the sale of merchant
credit card processing services during second quarter 2002. During the period
ended June 30, 2001, miscellaneous income included an increase in value of an
interest rate floor contract. The Company had no realized gains or losses
associated with derivative financial instruments for the six months ended June
30, 2002. During the six month period ended June 30, 2002, there were no gains
or losses from the sale of securities; during the six month period ended June
30, 2001, there was a $195,000 gain on sale of securities.
Non-Interest Expense. Total non-interest expense was $4.2 million in the
second quarter of 2002 a decrease of 4% from the same period in 2001. Salary
and employee benefits totaled $2.4 million for the three months ended June 30,
2002 and 2001. The decrease in non-interest expense for the period ending June
30, 2002 is primarily due to management's focused efforts to control expenses.
Other expense decreased 16% to $1.0 million for the three months ended June 30,
2002 as compared to the same period in 2001. The decrease in other expense is
partially attributable to a reduction in merchant processing expense, resulting
from the sale of merchant credit card processing services during second quarter
2002.
Total non-interest expense was $8.4 million in the six months ended June
30, 2002, a decrease of 1% from the same period in 2001. The decrease in
non-interest expense for the period ending June 30, 2002 is primarily due to
management's focused efforts to control expenses. Other expense decreased 8% to
$2.0 million for the six months ended June 30, 2002 as compared to the same
period in 2001. The decrease in other expense is partially attributable to a
reduction in merchant processing expense, resulting from the sale of merchant
credit card processing services during second quarter 2002.
Income Taxes. The Company reported income taxes of $312,000 and $668,000
for the second quarters of 2002 and 2001, respectively. This represented an
effective tax rate of 33% for each period.
The Company reported income taxes of $717,000 and $1.3 million for the six
months ended June 30, 2002 and 2001, respectively. This represented effective
tax rates of 32% and 33% for the respective periods.
12
ANALYSIS OF FINANCIAL CONDITION
Investment Securities. Available-for-sale securities amounted to $76.3
million at June 30, 2002 compared to $84.3 million at December 31, 2001. This
decrease is attributable to paydowns on mortgage backed securities and
maturities during the period ended June 30, 2002. Average investment securities
for the six months ended June 30, 2002 amounted to $81.2 million compared to
$81.1 million for the year ended December 31, 2001.
Loans. At June 30, 2002, loans amounted to $505.9 million compared to
$490.6 million at December 31, 2001, an increase of $15.3 million. Average loans
represented 85% of total earning assets for the three months ended June 30,
2002, compared to 83% for the year ended December 31, 2001. Mortgage loans held
for sale were $2.1 million at June 30, 2002, a decrease of 61% from the December
31, 2001 balance of $5.3 million.
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 other 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
personnel 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 Statement of
Financial Accounting Standards ("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 June 30, 2002 and December 31, 2001, the recorded
investment in loans that were considered to be impaired under SFAS No. 114 was
approximately $8.7 million and $4.4 million, respectively, with related
allowance for loan losses of approximately $2.2 million and $699,000,
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.
13
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. After review of all relevant matters affecting loan
collectability, management believes that the allowance for loan losses is
appropriate.
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 loans
also can be affected by local economic conditions. At June 30, 2002,
approximately 7% 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.
Non-performing Assets. Non-performing assets totaled $8.9 million at June
30, 2002 or 1.43% of total assets, compared to $4.7 million at December 31,
2001, or 0.75% of total assets. Non-accrual loans were $8.6 million at June 30,
2002, an increase of $4.8 million from non-accruals of $3.8 million at December
31, 2001. As a percentage of total loans outstanding, non-accrual loans were
1.70% at June 30, 2002 compared to 0.77% at December 31, 2001. The Bank had
loans ninety days past due and still accruing at June 30, 2002 of $ 55,000 as
compared to $655,000 at December 31, 2001.
Total non-performing loans were $8.7 million and $4.4 million at June 30,
2002 and December 31, 2001, respectively. This increase is attributable to
customers that were adversely impacted by the slowdown in area businesses. The
ratio of non-performing loans to total loans was 1.71% at June 30, 2002, as
compared to 0.90% at December 31, 2001. The allowance for loan losses at June
30, 2002 amounted to $7.1 million or 1.41% of total loans compared to $6.1
million or 1.24% of total loans at December 31, 2001. This increase reflects an
increase in non-performing assets.
Deposits. Total deposits at June 30, 2002 were $505.0 million, an increase
of 3% over deposits of $490.2 million at December 31, 2001. Certificates of
deposit in amounts greater than $100,000 or more totaled $159.2 million at June
30, 2002 as compared to $156.0 million at December 31, 2001. At June 30, 2002,
brokered deposits amounted to $26.0 million as compared to $0 at December 31,
2001. This reflects management's efforts to manage the cost of funds by
replacing high cost local deposits with lower cost brokered deposits to fund
loan growth.
Borrowed Funds. Federal Home Loan Bank borrowings were $58.1 million at
June 30, 2002 compared to $68.2 million at December 31, 2001. The average
balance of Federal Home Loan Bank borrowings for the six months ended June 30,
2002 was $62.9 million compared to $42.5 million for the year ended December 31,
2001. At June 30, 2002, Federal Home Loan Bank borrowings with maturities
exceeding one year amounted to $58.0 million. The Company had no federal funds
purchased as of June 30, 2002 or December 31, 2001.
Interest Rate Risk Management. The objective of the Company's interest rate
risk management strategies is to identify and manage the sensitivity of net
interest income to changing interest rates, in order to achieve the Company's
overall financial goals.
The Company manages its exposure to fluctuations in interest rates through
policies established by the Asset/Liability Committee ("ALCO") of the Bank. The
ALCO meets periodically and has the responsibility for approving asset/liability
management policies, formulating and implementing strategies to improve balance
sheet positioning and/or earnings and reviewing the interest rate sensitivity of
the Company.
In order to assist in achieving a desired level of interest rate
sensitivity, the Company entered into off-balance sheet contracts during 2002
that are considered derivative financial instruments. These contracts consist
of interest rate swap agreements under which the Company pays a variable rate
and receives a fixed rate. At June 30, 2002, the Company had one interest rate
swap contract outstanding, accounted for as a cash flow hedge, with a notional
amount of $40 million. Under the swap agreement, the Company received 6.33% and
14
paid 4.75% (based on the prime rate at June 30, 2002). The swap agreement
matures in June 2004. Management believes that the risk associated with using
this type of derivative financial instrument to mitigate interest rate risk is
minimal and should not have any material unintended impact on the Company's
financial condition or results of operations.
Liquidity. The Bank's liquidity position is generally determined by the
need to respond to short term demand for funds created by deposit withdrawals
and the need to provide resources to fund assets, typically in the form of
loans. How the Bank responds to these needs is affected by the Bank's ability to
attract deposits, the maturity of the loans and securities, the flexibility of
assets within the securities portfolio, the current earnings of the Bank, and
the ability to borrow funds from other sources.
The Bank's primary sources of liquidity are cash and cash equivalents,
available-for-sale securities, deposit growth, and the cash flows from principal
and interest payments on loans and other earning assets. In addition, the Bank
is able, on a short-term basis, to borrow funds from the Federal Reserve System,
the Federal Home Loan Bank of Atlanta (FHLB) and The Bankers Bank, and is also
able to purchase federal funds from other financial institutions.
At June 30, 2002, the Bank had a significant amount of deposits in amounts
greater than $100,000, including brokered deposits. The balance and cost of
these deposits are more susceptible to changes in the interest rate environment
than other deposits. The Bank had a line of credit with the FHLB equal to 20%
of the Bank's total assets, with an outstanding balance of $58.1 million at June
30, 2002. The Bank also has the ability to borrow up to $26.5 million for the
purchase of overnight federal funds from three correspondent financial
institutions.
The liquidity ratio for the Bank, which is defined as net cash, interest
bearing deposits with banks, Federal Funds sold, certain investment securities
and certain FHLB advances available under the line of credit, as a percentage of
net deposits (adjusted for deposit runoff projections) and short-term
liabilities was 23.55% at June 30, 2002 and 25.82% at December 31, 2001. The
December 31, 2001 ratio has been restated to reflect an increase in the
percentage of borrowing availability at the FHLB, which the Bank recognizes as a
factor of its liquidity.
Capital Resources. Shareholders' equity at June 30, 2002 was $46.1 million
compared to $45.4 million at December 31, 2001. At June 30, 2002 and December
31, 2001, unrealized gains and losses, net of taxes, in the available-for-sale
securities portfolio amounted to a gain of $16,000 and a loss of $922,000,
respectively. Annualized return on average equity for the six months ended June
30, 2002 was 6.63% compared to 9.65% for the year ended December 31, 2001.
Total cash dividends paid during the six months ended June 30, 2002 amounted to
$629,000, a decrease of 2% compared to total cash dividends of $644,000 paid for
the first six months of 2001. This decrease is attributable to a reduction in
shares outstanding due to stock repurchase activity. The Company repurchased
$1.1 million, or 73,500 shares of its common stock during the six months ended
June 30, 2002 as part of the stock repurchase plan implemented in February 2002.
The Company's Board of Directors has authorized aggregate stock repurchases of
up to $3.0 million.
Under the regulatory capital guidelines, financial institutions are
currently required to maintain a total risk-based capital ratio of 8.0% or
greater, with a Tier 1 risk-based capital ratio of 4.0% or greater. Tier 1
capital is generally defined as shareholders' equity and Trust Preferred
Securities less all intangible assets and goodwill. The Company's Tier I
capital ratio was 10.92% and 11.14% at June 30, 2002 and December 31, 2001,
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 12.17% and 12.27% at
June 30, 2002 and December 31, 2001, respectively. In addition to the Tier I
and total risk-based capital requirements, financial institutions are also
required to maintain a leverage ratio of Tier 1 capital to total average assets
of 4.0% or greater. The Company's Tier I leverage capital ratio was 9.67% and
10.46% at June 30, 2002 and December 31, 2001, respectively.
15
A bank is considered to be "well capitalized" if it has a total risk-based
capital ratio of 10.0 % or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and has a leverage ratio of 5.0% or greater. Based upon these
guidelines, the Bank was considered to be "well capitalized" at June 30, 2002
and December 31, 2001.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of June 30, 2002 from that presented in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the opinion of management, the Company is not involved in any
pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Shareholders' Meeting - May 2, 2002
(b) Directors elected at the meeting are as follows: John H. Elmore,
Jr., Fred L. Sherrill, Jr., and Charles F. Murray.
Continuing directors include: Robert C. Abernethy, James S.
Abernethy, Larry E. Robinson, Bruce R. Eckard, Gary E. Matthews,
Dan Ray Timmerman, Sr., and Benjamin I. Zachary.
(c) At the May 2, 2002 Annual Shareholders Meeting the following
items were submitted to a vote of shareholders:
Election of Directors - The following directors were elected for
a term of three years.
Vote For Withhold Authority
-------- ------------------
John H. Elmore, Jr. 3,008,031 10,855
Fred L. Sherrill, Jr. 3,002,814 3,463
Charles F. Murray 3,024,472 2,634
Ratification of appointment of Independent Public Accountants -
Porter Keadle Moore LLP
Votes For - 3,000,065, Votes Against - 990,
Votes Abstained - 11,951
(d) Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit (3)(i) Articles of Incorporation of Peoples Bancorp of
North Carolina, Inc., incorporated by reference to
Exhibit (3)(i) to the Form 8-A filed with the
Securities and Exchange Commission on September 2,
1999
Exhibit (3)(ii) Amended and Restated Bylaws of Peoples Bancorp of
North Carolina, Inc., incorporated by reference to
Exhibit (3)(ii) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
Exhibit (4) Specimen Stock Certificate, incorporated by
reference to Exhibit (4) to the Form 8-A filed
with the Securities and Exchange Commission on
September 2, 1999
Exhibit (10)(a) Employment Agreement between Peoples Bank and Tony
W. Wolfe incorporated by reference to Exhibit
(10)(a) to the Form 10-K filed with the Securities
and Exchange Commission on March 30, 2000
Exhibit (10)(b) Employment Agreement between Peoples Bank and
Joseph F. Beaman, Jr. incorporated by reference to
Exhibit (10)(b) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(c) Employment Agreement between Peoples Bank and
Clifton A. Wike incorporated by reference to
Exhibit (10)(c) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(d) Employment Agreement between Peoples Bank and
William D. Cable incorporated by reference to
Exhibit (10)(d) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(e) Employment Agreement between Peoples Bank and
Lance A. Sellers incorporated by reference to
Exhibit (10)(e) to the Form 10-K filed with the
Securities and Exchange Commission on March 30,
2000
Exhibit (10)(f) Peoples Bancorp of North Carolina, Inc. Omnibus
Stock Ownership and Long Term Incentive Plan
incorporated by reference to Exhibit (10)(f) to
the Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000
Exhibit (10)(g) Employment Agreement between Peoples Bank and A.
Joseph Lampron incorporated by reference to
Exhibit (10)(g) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
Exhibit (10)(h) Peoples Bank Directors' and Officers' Deferral
Plan, incorporated by reference to Exhibit (10)(h)
to the Form 10-K filed with the Securities and
Exchange Commission on March 28, 2002
19
Exhibit (10)(i) Rabbi Trust for the Peoples Bank Directors' and
Officers' Deferral Plan, incorporated by reference
to Exhibit (10)(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
(b) Reports on Form 8-K
During the quarter ended June 30, 2002 the Company filed no
reports on Form 8-K.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Peoples Bancorp of North Carolina, Inc.
August 13, 2002 By: /s/ Tony W. Wolfe
-------------------------- -------------------------------------
Date Tony W. Wolfe
President and Chief Executive Officer
(Principal Executive Officer)
August 13, 2002 By: /s/ A. Joseph Lampron
-------------------------- -------------------------------------
Date A. Joseph Lampron
Executive Vice President and Chief
Financial Officer
(Principal Financial and Principal
Accounting Officer)
21