FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
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Commission file number 000-27205
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NORTH CAROLINA 56-2132396
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
518 WEST C STREET
NEWTON, NORTH CAROLINA 28658
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(Address of Principal Executive Offices) (Zip Code)
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Securities to be Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $37,396,118.80 based on the closing price of such common stock on March 14, 2003, which was $14.60 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2002 (the "Annual Report"), which is included as Appendix A to the Proxy Statement for the 2003 Annual Meeting of Shareholders, are incorporated by reference into Part I and Part II.
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders of Peoples Bancorp of North Carolina, Inc. to be held on May 1, 2003 (the "Proxy Statement"), are incorporated by reference into Part III.
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF PEOPLES BANCORP OF
NORTH CAROLINA, INC. (THE "COMPANY"). THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES AND ARE BASED ON THE BELIEFS AND ASSUMPTIONS OF
MANAGEMENT OF THE COMPANY AND ON THE INFORMATION AVAILABLE TO MANAGEMENT AT THE
TIME THAT THESE DISCLOSURES WERE PREPARED. THESE STATEMENTS CAN BE IDENTIFIED BY
THE USE OF WORDS LIKE "EXPECT," "ANTICIPATE," "ESTIMATE" AND "BELIEVE,"
VARIATIONS OF THESE WORDS AND OTHER SIMILAR EXPRESSIONS. READERS SHOULD NOT
PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS AS A NUMBER OF IMPORTANT
FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, (1) COMPETITION IN THE MARKETS
SERVED BY PEOPLES BANK (THE "BANK"), (2) CHANGES IN THE INTEREST RATE
ENVIRONMENT, (3) GENERAL NATIONAL, REGIONAL OR LOCAL ECONOMIC CONDITIONS MAY BE
LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION
IN CREDIT QUALITY AND THE POSSIBLE IMPAIRMENT OF COLLECTIBILITY OF LOANS, (4)
LEGISLATIVE OR REGULATORY CHANGES, INCLUDING CHANGES IN ACCOUNTING STANDARDS,
(5) SIGNIFICANT CHANGES IN THE FEDERAL AND STATE LEGAL AND REGULATORY
ENVIRONMENT AND TAX LAWS, (6) THE IMPACT OF CHANGES IN MONETARY AND FISCAL
POLICIES, LAWS, RULES AND REGULATIONS AND (7) OTHER RISKS AND FACTORS IDENTIFIED
IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
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 15 offices located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, and Hickory, North Carolina. At December 31, 2002, the Company had total assets of $644.7 million, net loans of $519.1 million, deposits of $515.7 million, investment securities of $71.7 million, and shareholders' equity of $48.6 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").
At December 31, 2002, the Bank employed 201 full-time equivalent employees.
SUBSIDIARIES
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.
MARKET AREA
The Bank's primary market consists of the communities in an approximately 25-mile radius around its headquarters office in Newton, North Carolina. This area includes Catawba County, Alexander County, Lincoln County, the western portion of Iredell County and portions of northeast Gaston County. The Bank is located only 40 miles north of Charlotte, North Carolina and the Bank's primary market area is and will continue to be significantly affected by its close proximity to this major metropolitan area.
Employment in the Bank's primary market area is diversified among manufacturing, agricultural, retail and wholesale trade, technology, services and utilities. Catawba County's largest employers include CommScope, Inc. (manufacturer of fiber optic cable and accessories), Corning Cable Systems, LLC (manufacturer of fiber optic cable and accessories) and Frye Regional Medical Center. Other significant area employers include several furniture manufacturing companies (Thomasville Furniture Industries, Inc., Century Furniture Company, Inc. and Hickory Springs Manufacturing Co.) as well as Catawba County Schools.
COMPETITION
The Bank has operated in the Catawba Valley region for more than 90 years and is the only financial institution headquartered in Newton. However, the Bank faces strong competition both in attracting deposits and making loans. Its most direct competition for deposits has historically come from other commercial banks, credit unions and brokerage firms located in its primary market area, including large financial institutions. Two national money center commercial banks are headquartered in Charlotte, North Carolina, only 40 miles from the Bank's primary market area. Based upon June 30, 2002 comparative data, the Bank had 20.09 % of the deposits in Catawba County, placing it third in deposit size among a total of 11 banks with branch offices in Catawba County.
The Bank has also faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The Bank's deposit base has grown principally due to economic growth in the Bank's market area coupled with the implementation of new and competitive deposit products. The ability of the Bank to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for loans from commercial banks and mortgage banking companies. The Bank competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. Competition is increasing as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.
SUPERVISION AND REGULATION
Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company, the Bank and any subsidiaries. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. The Company cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation.
GENERAL. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance funds in the event the depository institution becomes in danger of default or in default. For example, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank's total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all acceptable capital standards as of the time the bank fails to comply with such capital restoration plan. The Company, as a registered bank holding company, is subject to the regulation of the Federal Reserve. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a
nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
In addition, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by its deposit insurance funds as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the deposit insurance funds. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
As a result of the Company's ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to regulation and supervision by the Commissioner.
CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve system and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve's capital adequacy guidelines are required to comply with the Federal Reserve's risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be "Tier I capital," principally consisting of common stockholders' equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum.
CAPITAL REQUIREMENTS FOR THE BANK. The Bank, as a North Carolina commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a North Carolina chartered, FDIC-insured commercial bank which is not a member of the Federal Reserve System, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC's regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable capital requirements as of December 31, 2002.
DIVIDEND AND REPURCHASE LIMITATIONS. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company are subject to certain requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, 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 or repurchase shares may be dependent upon the Company's receipt of dividends from the Bank.
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).
DEPOSIT INSURANCE ASSESSMENTS. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Bank Insurance Fund, such as the Bank, shall be as specified in a schedule required to be issued by the FDIC. FDIC assessments for deposit insurance range from 0 to 31 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, or 5% of its outstanding advances (borrowings) from the FHLB of Atlanta. On December 31, 2002, the Bank was in compliance with this requirement.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions' records of meeting the credit needs of their communities, using the ratings of "outstanding," "satisfactory," "needs to improve," or "substantial noncompliance," and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a "satisfactory" rating in its last CRA examination which was conducted during March 2001.
PROMPT CORRECTIVE ACTION. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under the regulations, an institution is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) "significantly undercapitalized" if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C) "critically undercapitalized" if the institution has a ratio of tangible equity to total assets equal to or less than 2%.
CHANGES IN CONTROL. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of the Company. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the stock is registered under Section 12 of the Securities Exchange Act of 1934 or the acquiror will be the largest shareholder after the acquisition.
FEDERAL SECURITIES LAW. The Company has registered its Common Stock with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company.
TRANSACTIONS WITH AFFILIATES. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a
depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution's loans-to-one-borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any "interested" director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.
LOANS TO ONE BORROWER. The Bank is subject to the Commissioner's loans to one borrower limits which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus.
GRAMM-LEACH-BLILEY ACT. Federal legislation adopted by Congress during 1999, the Gramm-Leach-Bliley Act (the "GLB Act"), has dramatically changed various federal laws governing the banking, securities, and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them.
In general, the GLB Act (i) expands opportunities to affiliate with
securities firms and insurance companies; (ii) overrides certain state laws that
would prohibit certain banking and insurance affiliations; (iii) expands the
activities in which banks and bank holding companies may participate; (iv)
requires that banks and bank holding companies engage in some activities only
through affiliates owned or managed in accordance with certain requirements; (v)
reorganizes responsibility among various federal regulators for oversight of
certain securities activities conducted by banks and bank holding companies; and
(vi) requires banks to adopt and implement policies and procedures for the
protection of the financial privacy of their customers, including procedures
that allow customers to elect that certain financial information not to be
disclosed to certain persons.
USA PATRIOT ACT. In response to the events of September 11th, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through many means, including broadened anti-money laundering requirements. For example, by way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information sharing among banks, bank regulatory agencies, and law enforcement bodies to prevent money laundering. Additionally, the USA PATRIOT Act imposes several affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents, and parties registered under the Commodity Exchange Act.
Pursuant to the USA PATRIOT Act, all financial institutions must establish
anti-money laundering programs that include, at a minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.
Also, the Act requires certain minimum standards with respect to customer
identification and verification. The Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United States persons or
their representatives (including foreign individuals visiting the United States)
to establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering. Furthermore, effective December 25, 2001, financial institutions
were prohibited from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that do not have a
physical presence in any country), and are subject to certain recordkeeping
obligations with respect to correspondent accounts of foreign banks.
Bank regulators are directed to consider a company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.
SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 was enacted in July 2002, and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act became effective immediately while others will be implemented over the coming months.
In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies' reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
The full impact of the Sarbanes-Oxley Act cannot be fully measured until the SEC acts to implement the numerous provisions for which Congress has delegated implementation authority. The economic and operational effects of this new legislation on public companies, including the Company, will be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, the Company and the Bank will be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in its market.
OTHER. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators. Additional regulations also establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.
The Bank is subject to examination by the FDIC and the Commissioner. In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit, fair credit reporting laws and laws relating to branch banking. The Bank, as an insured North Carolina commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital stock of a North Carolina commercial bank is impaired by losses or otherwise, the Commissioner is authorized to require payment of the deficiency by assessment upon the bank's shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder, upon 30 days notice, to sell as much as is necessary of the stock of such shareholder to make good the deficiency.
ITEM 2. PROPERTIES
At December 31, 2002, the Bank conducted its business from the headquarters office in Newton, North Carolina, and its fifteen other branch offices in Lincolnton, Hickory, Newton, Catawba, Conover, Claremont, Maiden, Denver, Triangle and Hiddenite, North Carolina. The following table sets forth certain information regarding the Bank's properties at December 31, 2002. Unless indicated otherwise, all properties are owned by the Bank.
Corporate Office 102 Leonard Avenue
518 West C Street Newton, NC 28658
Newton, North Carolina 28658
420 West A Street 2050 Catawba Valley Boulevard
Newton, North Carolina 28658 Hickory, North Carolina 28601
2619 North Main Avenue 760 Highway 27 West
Newton, North Carolina 28658 Lincolnton, NC 28092
213 1st Street, West
Conover, North Carolina 28613 LEASED
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3261 East Main Street 1333 2nd Street NE
Claremont, North Carolina 28610 Hickory, North Carolina 28601
6125 Highway 16 South 114 West C Street
Denver, North Carolina 28037 Newton, North Carolina 28658
(off-site storage only)
5153 N.C. Highway 90E
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Hiddenite, North Carolina 28636 1910 East Main Street
Lincolnton, North Carolina 28092
200 Island Ford Road
Maiden, North Carolina 28650
3310 Springs Road NE
Hickory, North Carolina 28601
142 South Highway 16
Denver, North Carolina 28037
106 North Main Street
Catawba, North Carolina 28609
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the management, the Bank is not involved in any pending legal proceedings other than routine, non-material proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Bank's shareholders during the quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this Item is set forth under the section captioned "Market for the Company's Common Equity and Related Shareholder Matters" on page A-18 of the Annual Report, which section is incorporated herein by reference. See "Item 1. BUSINESS--Supervision and Regulation" above for regulatory restrictions which limit the ability of the Company to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned "Selected Financial Data" on page A-2 of the Annual Report, which table is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is set forth in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages A-3 through A-16 of the Annual Report, which section is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section captioned "Quantitative and Qualitative Disclosures About Market Risk" on page A-17 of the Annual Report, which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data set forth on pages A-21 through A-44 of the Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive officers of the Company is set forth under the sections captioned "Proposal 1 - Election of Directors - Nominees" on pages 5 and 6 of the Proxy Statement and "Proposal 1 - Election of Directors - Executive Officers" on page 9 of the Proxy Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on page 5 of the Proxy Statement, which section is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections captioned "Proposal 1 - Election of Directors - Director Compensation" on page 8 and "- Management Compensation," " - Stock Benefits Plan," "- Employment Agreements," "- Incentive Compensation Plans," "- Profit Sharing and 401(k) Plans," "- Deferred Compensation Plan," "- Supplemental Retirement Plan," and "- Discretionary Bonuses and Service Awards," on pages 9 through 19 of the Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the section captioned "Security Ownership of Certain Beneficial Owners" on pages 2 through 4 of the Proxy Statement and the section captioned "Equity Compensation Plan Information" on page 13 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors - Indebtedness of and Transactions with Management" on page 19 through 20 of the Proxy Statement, which section is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains systems of disclosure controls and procedures and internal controls and procedures for financial reporting designed to provide reasonable assurance as to the reliability of its published financial statements and other disclosures included in this Annual Report on Form 10-K. The Board of Directors, operating through its Audit and Review Committee, which is composed entirely of independent outside directors, provides oversight to the financial reporting process.
The Chief Executive Officer and the Chief Financial Officer of the Company
(its principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within 90 days prior to
the date of the filing of this Report, that the Company's disclosure controls
and procedures and internal controls and procedures for financial reporting are
effective to ensure that information required to be disclosed by the Company in
the reports filed or submitted by it under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer of the Company, as appropriate to allow timely decisions regarding
required disclosure.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
15(a)1. Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit (13) and incorporated herein by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of December 31, 2002 and 2001
(c) Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001 and 2000
(d) Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000
(e) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000
(f) Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
(g) Notes to Consolidated Financial Statements
15(a)2. Financial Consolidated Statement Schedules
All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.
15(a)3. 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
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)(d) 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)(e) 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)(f) 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)(g) 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
Exhibit (10)(h) 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
Exhibit (10)(i) Description of Service Recognition Program
maintained by Peoples Bank
Exhibit (11) Statement regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 2002 Annual Report of Peoples Bancorp of North
Carolina, Inc.
Exhibit (21) Subsidiaries of Peoples Bancorp of North Carolina,
Inc.
Exhibit (23)(a) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on August 10,
2000
Exhibit (23)(b) Consent of Porter Keadle Moore, LLP for
Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on September
28, 2000
Exhibit (99) Certification Pursuant to 18 U.S.C. Section 1350
|
15(b) The Company filed no reports on Form 8-K during the last quarter of the fiscal year ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: /s/ Tony W. Wolfe
---------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
Date: March 27, 2003
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Tony W. Wolfe President and Chief Executive Officer March 27, 2003
--------------------------- (Principal Executive Officer) --------------
Tony W. Wolfe
/s/ Robert C. Abernethy Chairman of the Board and Director March 27, 2003
--------------------------- --------------
Robert C. Abernethy
/s/ A. Joseph Lampron Executive Vice President and Chief Financial March 27, 2003
--------------------------- Officer (Principal Financial and --------------
A. Joseph Lampron Principal Accounting Officer)
/s/ James S. Abernethy Director March 27, 2003
--------------------------- --------------
James S. Abernethy
/s/ Bruce R. Eckard Director March 27, 2003
--------------------------- --------------
Bruce R. Eckard
/s/ John H. Elmore, Jr. Director March 27, 2003
--------------------------- --------------
John H. Elmore, Jr.
/s/ Charles F. Murray Director March 27, 2003
--------------------------- --------------
Charles F. Murray
/s/ Gary E. Matthews Director March 27, 2003
--------------------------- --------------
Gary E. Matthews
/s/ Larry E. Robinson Director March 27, 2003
--------------------------- --------------
Larry E. Robinson
/s/ Fred L. Sherrill, Jr. Director March 27, 2003
--------------------------- --------------
Fred L. Sherrill, Jr.
/s/ Dan Ray Timmerman, Sr. Director March 27, 2003
--------------------------- --------------
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary Director March 27, 2003
--------------------------- --------------
Benjamin I. Zachary
|
I, Tony W. Wolfe, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp
of North Carolina, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Tony W. Wolfe
-------------------------------------
Tony W. Wolfe
President and Chief Executive Officer
|
I, A. Joseph Lampron, certify that:
1. I have reviewed this annual report on Form 10-K of Peoples Bancorp
of North Carolina, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 27, 2003
/s/ A. Joseph Lampron
-------------------------------------
A. Joseph Lampron
Executive Vice President and Chief Financial Officer
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Exhibit (10)(i)
Description of Service Recognition Program
Peoples Bank maintains a Service Recognition Program, under which directors, officers and employees are eligible for awards. Under this Program, directors, officers and employees are awarded a combination of Common Stock of the Company and cash, with the amount of the award based upon the length of service to the Bank. Any Common Stock awarded under the Program is purchased by the Bank on the open market, and no new shares are issued by the Company under the Service Recognition Program. The following schedule shows the award levels for various years of service to the Bank.
Cash
Stock (to help with Total
Years of Service Value tax liability) Value
---------------- ------ --------------- ------
5 $ 250 $ 75 $ 325
---------------- ------ --------------- ------
10 500 150 650
---------------- ------ --------------- ------
15 1,000 275 1,275
---------------- ------ --------------- ------
20 2,000 500 2,500
---------------- ------ --------------- ------
25 3,000 750 3,750
---------------- ------ --------------- ------
30 4,000 1,000 5,000
---------------- ------ --------------- ------
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Exhibit (11)
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Basic earnings per common share of $ 1.09 for the year ended December 31, 2002 was calculated by dividing net income of $ 3.4 million for the period January 1, 2002 to December 31, 2002 by the weighted-average number of common shares outstanding of 3,151,975.
Diluted earnings per common share of $ 1.09 for the year ended December 31, 2002 was calculated by dividing net income of $ 3.4 million for the period January 1, 2002 to December 31, 2002 by the weighted-average number of common shares outstanding of 3,159,267.
Exhibit (12)
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 6 represent average daily balances.
Exhibit (13)
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 15 offices located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, and Hickory, North Carolina. At December 31, 2002, the Company had total assets of $644.7 million, net loans of $519.1 million, deposits of $515.7 million, investment securities of $71.7 million, and shareholders' equity of $48.6 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").
At December 31, 2002, the Bank employed 201 full-time equivalent employees.
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.
SELECTED
FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
2002 2001 2000 1999 1998
----------------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Interest income $ 36,624 41,898 40,859 32,302 29,215
Interest expense 15,777 23,027 19,432 14,790 14,540
----------------- ---------- ---------- ---------- ----------
Net interest income 20,847 18,871 21,427 17,512 14,675
Provision for loan losses 5,432 3,545 1,879 425 445
----------------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 15,415 15,326 19,548 17,087 14,230
Non-interest income 6,491 8,263 3,915 3,380 3,646
Non-interest expense 16,758 16,752 15,509 13,832 12,020
----------------- ---------- ---------- ---------- ----------
Income before taxes 5,148 6,837 7,954 6,635 5,856
Income taxes 1,712 2,262 2,576 2,093 1,847
----------------- ---------- ---------- ---------- ----------
Net income $ 3,436 4,575 5,378 4,542 4,009
----------------- ---------- ---------- ---------- ----------
SELECTED YEAR-END BALANCES
Assets $ 644,742 619,505 519,002 432,435 402,273
Available for sale securities 71,736 84,286 71,565 62,498 63,228
Loans, net 519,122 484,517 406,226 335,274 297,488
Mortgage loans held for sale 5,065 5,339 1,564 1,685 9,260
Interest-earning assets 608,619 586,496 490,449 411,734 383,270
Deposits 515,739 490,223 450,073 376,634 350,067
Interest-bearing liabilities 527,192 515,989 420,594 339,243 315,387
Shareholders' equity $ 48,605 45,401 43,039 37,998 35,924
Shares outstanding* 3,133,547 3,218,714 3,218,714 3,218,950 3,219,150
----------------- ---------- ---------- ---------- ----------
SELECTED AVERAGE BALANCES
Assets $ 624,796 575,142 469,536 417,387 369,864
Available for sale securities 77,414 84,549 66,218 60,642 59,824
Loans 507,879 454,371 374,226 324,651 271,819
Interest-earning assets 592,947 545,945 447,645 396,606 351,730
Deposits 499,224 481,289 408,210 363,637 321,371
Interest-bearing liabilities 516,314 472,435 373,167 326,164 293,631
Shareholders' equity $ 48,257 47,432 42,852 39,348 33,303
Shares outstanding* 3,151,975 3,218,714 3,218,714 3,218,950 3,058,160
----------------- ---------- ---------- ---------- ----------
PROFITABILITY RATIOS
Return on average total assets 0.55% 0.80% 1.15% 1.09% 1.08%
Return on average shareholders' equity 7.12% 9.65% 12.55% 11.54% 12.04%
Dividend payout ratio 36.58% 28.14% 23.39% 23.84% 22.61%
----------------- ---------- ---------- ---------- ----------
LIQUIDITY AND CAPITAL RATIOS (AVERAGES)
Loan to deposit 101.73% 94.41% 91.67% 89.28% 84.58%
Shareholders' equity to total assets 7.72% 8.25% 9.13% 9.43% 9.00%
----------------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK*
Net income $ 1.09 1.42 1.67 1.41 1.31
Cash dividends $ 0.40 0.40 0.39 0.34 0.28
Book value $ 15.51 14.11 13.37 11.81 11.16
----------------- ---------- ---------- ---------- ----------
* Shares outstanding and per share computations have been restated to reflect a 10% stock dividend during second quarter
2000 and the 3 for 2 stock split during first quarter 1999.
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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, 2002, 2001 and 2000. 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").
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 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 2003 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 1, 2003 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 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, market comparisons or internally generated modeling techniques. The Company's internal models generally involve present value of cash flow techniques. The various techniques are discussed in greater detail elsewhere in management's discussion and analysis and the Notes to the Consolidated Financial Statements.
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, the accounting for the transfer of financial assets and extinguishments of liabilities in accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). For a more complete discussion of these policies, see the Notes to the Consolidated Financial Statements.
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.
The remainder of management's discussion and analysis of the Company's results of operations and financial position should be read in conjunction with the Consolidated Financial Statements and related notes presented on pages A-20 through A-44.
RESULTS OF OPERATIONS
SUMMARY
The Company reported earnings of $3.4 million in 2002, or $1.09 basic and
diluted net earnings per share, a 25% decrease as compared to $4.6 million, or
$1.42 basic and diluted net earnings per share, for 2001. Net earnings for 2001
represented a decrease of 15% as compared to 2000 net earnings of $5.4 million.
The decline in net earnings in 2002 was primarily attributable to an increase in
the provision for loan losses and decreased non-interest income. Increased net
interest income partially offset the decline in net earnings. The
decrease in net income in 2001 compared to 2000 resulted from decreased net interest income combined with charge-offs of certain non-performing loans.
Return on average assets in 2002 was 0.55%, compared to 0.80% in 2001 and 1.15% in 2000. Return on average shareholders' equity was 7.12% in 2002 compared to 9.65% in 2001 and 12.55% in 2000.
NET INTEREST INCOME
Net interest income, the largest component of the Company's income, is the
amount by which interest and fees generated by interest-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 interest-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 interest-earning assets, and represents the Company's net yield on its
interest-earning assets.
Table 1 sets forth for each category of interest-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, 2002, 2001 and 2000. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on average total interest-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, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans $507,879 30,256 5.96% $454,371 35,210 7.75% $374,226 35,271 9.43%
Interest rate swap agreements - 509 1.16% - - - - - -
Loan fees - 1,274 0.29% - 1,302 0.33% - 1,153 0.31%
--------------------------------------------------------------------------------------------
TOTAL LOANS 507,879 32,039 6.31% 454,371 36,512 8.04% 374,226 36,424 9.73%
Investments - taxable 63,792 3,726 5.84% 64,469 4,160 6.45% 44,320 2,994 6.76%
Investments - nontaxable 13,622 929 6.82% 20,080 1,381 6.88% 21,898 1,497 6.84%
Federal funds sold 3,356 45 1.34% 3,776 127 3.36% 4,593 282 6.14%
Other 4,298 201 4.68% 3,249 187 5.74% 2,608 171 6.56%
--------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 592,947 36,940 6.23% 545,945 42,367 7.76% 447,645 41,368 9.24%
Cash and due from banks 11,351 12,273 11,538
Other assets 27,103 22,266 14,634
Allowance for loan losses (6,607) (5,342) (4,281)
--------------------------------------------------------------------------------------------
TOTAL ASSETS $624,795 575,142 469,536
============================================================================================
INTEREST-BEARING LIABILITIES:
NOW accounts $ 60,757 628 1.03% 38,584 413 1.07% 32,866 456 1.39%
Regular savings accounts 21,908 95 0.44% 22,670 178 0.78% 24,982 472 1.89%
Money market accounts 72,170 1,282 1.78% 65,846 2,373 3.60% 55,982 2,832 5.06%
Time deposits 285,133 10,358 3.63% 299,815 17,827 5.95% 241,549 14,567 6.03%
FHLB borrowings 60,956 2,659 4.36% 42,533 2,118 4.98% 15,806 974 6.16%
Demand notes payable to U.S.
Treasury 811 12 1.46% 897 33 3.64% 852 55 6.46%
Trust preferred securities 14,000 735 5.25% 499 30 6.08% - - 0.00%
Other 579 8 1.38% 1,592 54 3.39% 1,130 76 6.73%
--------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 516,314 15,777 3.06% 472,435 23,026 4.87% 373,167 19,432 5.21%
Demand deposits 59,256 54,374 52,831
Other liabilities 2,326 3,486 3,268
Shareholders' equity 48,257 47,432 42,852
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $626,153 577,727 472,118
============================================================================================
NET INTEREST SPREAD $ 21,163 3.17% 19,341 2.89% 21,936 4.03%
============================================================================================
NET YIELD ON INTEREST-EARNING ASSETS 3.57% 3.54% 4.90%
============================================================================================
TAXABLE EQUIVALENT ADJUSTMENT
INVESTMENT SECURITIES $ 316 470 509
--------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 20,847 18,871 21,427
============================================================================================
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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, 2002 DECEMBER 31, 2001
TOTAL TOTAL
CHANGES IN CHANGES IN INCREASE CHANGES IN CHANGES IN INCREASE
(DOLLARS IN THOUSANDS) AVERAGE VOLUME AVERAGE RATES (DECREASE) AVERAGE VOLUME AVERAGE RATES (DECREASE)
==========================================================================================================================
INTEREST INCOME:
Loans: Net of unearned income $ 3,838 (8,312) (4,474) 7,120 (7,032) 88
Investments - taxable (42) (393) (435) 1,332 (165) 1,167
Investments - nontaxable (442) (10) (452) (125) 9 (116)
Federal funds sold (10) (72) (82) (39) (116) (155)
Other 67 (52) 15 48 (33) 15
-----------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 3,411 (8,839) (5,428) 8,336 (7,337) 999
INTEREST EXPENSE:
NOW accounts $ 233 (17) 216 70 (113) (43)
Regular savings accounts (5) (78) (83) (31) (263) (294)
Money market accounts 170 (1,261) (1,091) 427 (886) (459)
Time deposits (703) (6,766) (7,469) 3,489 (229) 3,260
FHLB borrowings 861 (320) 541 1,489 (345) 1,144
Demand notes payable to U.S.
Treasury (2) (19) (21) 2 (25) (23)
Trust preferred securities 765 (60) 705 30 (0) 30
Other (24) (23) (47) 24 (45) (21)
-----------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE $ 1,295 (8,544) (7,249) 5,500 (1,905) 3,594
-----------------------------------------------------------------------------------------
NET INTEREST INCOME $ 2,116 (295) 1,821 2,836 (5,431) (2,595)
=========================================================================================
|
Net interest income on a tax equivalent basis totaled $21.2 million in 2002, increasing 9% or $1.8 million from 2001. This increase was primarily attributable to a decrease in the cost of funds to 3.06% in 2002 from 4.87% in 2001.
Interest income decreased $5.4 million or 13% in 2002 primarily due to a decrease in the Bank's prime lending rate from an average rate of 6.91% in 2001 to 4.67% in 2002. The decrease in rates resulted in a decrease in the yield on interest-earning assets to 6.23% in 2002 as compared to 7.76% in 2001, but was partially offset by an increase in average interest-earning assets of $47.0 million. The $47.0 million increase in average interest-earning assets was attributable primarily to a $53.5 million increase in loans offset by a $7.1 million decrease in investments.
Interest expense decreased $7.2 million or 31% in 2002 as the Bank was able to reprice or replace maturing deposits at lower rates. The decrease in the cost of funds was primarily attributable to a decrease in the average rate paid on time deposits, which fell to 3.63% in 2002 from 5.95% in 2001. This decrease in cost was offset by growth in average interest-bearing liabilities, which increased by $43.9 million to $516.3 million in 2002 from $472.4 million in 2001. This growth in average interest-bearing liabilities was attributable to an increase in Federal Home Loan Bank ("FHLB") borrowings of $18.4 million to $61.0 million in 2002 from $42.5 million in 2001, an increase in trust preferred securities of $13.5 million to $14.0 million in 2002 from $499,000 in 2001, and an increase in average interest-bearing deposits, which increased by $13.1 million, to $440.0 million in 2002 from $426.9 million in 2001.
Net interest income on a tax-equivalent basis decreased $2.6 million or 12% to $19.3 million in 2001 from $21.9 million in 2000. The interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 3.54% in 2001, a decrease from the 2000 net interest spread of 4.03%. The net yield on interest-earning assets in 2001 decreased to 3.54% from the 2000 net interest margin of 4.90%.
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 factors such 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
No. 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 $5.4 million, $3.5 million, and $1.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in the provision for loan losses reflects an increase in non-performing assets resulting from the continuing slowdown in the local economy, including several large companies that have dramatically reduced their activities. The slowdown in activity from the large companies adversely impacted ancillary businesses that include our customers. Please see the section below entitled "Allowance for Loan Losses" for a more complete discussion of the Bank's policy for addressing possible loan losses.
NON-INTEREST INCOME
Non-interest income for 2002 totaled $6.5 million, a decrease of $1.8
million or 22% from non-interest income of $8.3 million for 2001. The decrease
in non-interest income for 2002 reflected reductions in gains on sales of
securities, miscellaneous income and mortgage banking income. These decreases
were partially offset by an increase in service charges and commissions for
insurance and brokerage services. Non-interest income for 2001 increased $4.4
million or 113% over 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.
Miscellaneous income for 2002 totaled $1.1 million, a decrease of 44% from $2.0 million for 2001. The decrease in miscellaneous income was partially attributable to a reduction in merchant processing income, resulting from the sale of merchant credit card processing services during first quarter 2002. During 2001, miscellaneous income included an increase in the value of an interest rate floor contract of $158,000. The Company had no realized gains or losses associated with derivative financial instruments during 2002.
The Company reported a net gain on sale of securities of $626,000 in 2002, compared to a net gain on sale of securities of $1.6 million during 2001. During 2000 a net loss on sale of securities of approximately $483,000 was recognized.
Mortgage banking income decreased to $702,000 in 2002 from $1.0 million in 2001, primarily due to an increase in the amortization of mortgage servicing rights to $310,000 in 2002 from $196,000 in 2001, resulting from an increase in refinancing during 2002. Mortgage banking income increased $773,000 in 2001 from the $241,000 reported in 2000. The increase in mortgage banking income for 2001 reflected a strong demand for mortgage loan services during 2001.
Service charges on deposit accounts totaled $3.1 million during 2002, an increase of $255,000, or 9% over 2001. This increase is primarily attributable to growth in the deposit base coupled with normal pricing changes, which resulted in an increase in account maintenance fees. Service charge income increased $1.2 million, or 77% in 2001 compared to 2000. Increases in service charges on deposit accounts for 2001 were 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.
Insurance and brokerage commissions increased to $478,000 in 2002 from $349,000 in 2001. This increase is primarily attributable to increased activity associated with the Bank's investment subsidiary, Peoples Investment Services, Inc.
Table 3 presents a summary of non-interest income for the years ended December 31, 2002, 2001 and 2000.
TABLE 3 - NON-INTEREST INCOME
(DOLLARS IN THOUSANDS) 2002 2001 2000
==========================================================
Service charges $3,061 2,805 1,588
Other service charges and fees 503 472 367
Gain (loss) on sale of securities 626 1,614 (483)
Mortgage banking income 702 1,014 241
Insurance and brokerage commissions 478 349 169
Miscellaneous 1,121 2,009 2,034
---------------------
TOTAL NON-INTEREST INCOME $6,491 8,263 3,916
=====================
|
NON-INTEREST EXPENSE
Total non-interest expense amounted to $16.8 million for 2002 and 2001.
Non-interest expense for 2001 increased 8% over the $15.5 million reported in
2000.
Salary and employee benefit expense was $9.6 million in 2002, compared to $9.1 million during 2001, an increase of $454,000 or 5%, following a $216,000 or 2% increase in salary and employee benefit expense in 2001 over 2000. The increase during 2002 is attributable to an increase in salary expenses of $146,000 for merit increases coupled with expense associated with the supplemental retirement plan offered to key employees totaling $156,000. The increase during 2001 resulted from merit increases.
The Company recorded occupancy expense of $3.1 million in 2002, compared to $3.0 million during 2001, an increase of $159,000 or 5%, following an increase of $474,000 or 19% in occupancy expenses in 2001 over 2000. Increases in 2002 and 2001 are primarily attributable to an increase in overhead expenses associated with the Bank's growth and expansion of its branch network.
The total of all other operating expenses decreased $606,000 or 13% during 2002. The decrease in other expense is primarily attributable to a reduction in merchant processing expense resulting from the sale of the merchant credit card processing service during first quarter. Other operating expense increased $552,000 or 13% in 2001 over 2000.
Table 4 presents a summary of non-interest expense for the years ended December 31, 2002, 2001 and 2000.
TABLE 4 - NON-INTEREST EXPENSE
(DOLLARS IN THOUSANDS) 2002 2001 2000
========================================================
Salaries and wages $ 7,376 7,230 6,576
Employee benefits 2,193 1,885 2,323
-----------------------
TOTAL PERSONNEL EXPENSE 9,569 9,115 8,899
Occupancy expense 3,143 2,984 2,510
Office supplies 283 362 330
FDIC deposit insurance 157 85 77
Professional services 264 314 270
Postage 221 231 205
Telephone 315 333 380
Director fees and expense 352 219 177
Marketing and public relations 219 243 221
Merchant processing expense 78 552 502
Other operating expense 2,157 2,314 1,938
-----------------------
TOTAL NON-INTEREST EXPENSE $16,758 16,752 15,509
=======================
|
INCOME TAXES
Total income tax expense was $1.7 million in 2002 compared with $2.3
million in 2001 and $2.6 million in 2000. The primary reason for the decrease
in taxes was the decrease in pretax income during 2002 and 2001. The Company's
effective tax rates were 33.26%, 33.08% and 32.39% in 2002, 2001 and 2000,
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, FHLB advances and the cash flows from principal and interest payments on loans and other interest-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, 2002, the Bank had a significant amount of deposits in amounts greater than $100,000, including brokered deposits of $39.9 million, which mature over the next two years. The balance and cost of these deposits may be more susceptible to changes in the interest rate environment than other deposits. For additional information, please see the section below entitled "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 $63.1 million at December 31, 2002. The Bank also had the ability to borrow up to $26.5 million for the purchase of overnight federal funds from three correspondent financial institutions as of December 31, 2002.
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 22.83% at December 31, 2002, 25.82% at December 31, 2001, and 26.53% at December 31, 2000. The December 31, 2001 and 2000 ratios have been restated to reflect changes in the FHLB borrowing availability calculation, which the Bank recognizes as a factor of its liquidity. The liquidity ratios for all periods reported was greater than the minimum required liquidity ratio of 20% as defined in the Bank's Asset/Liability and Interest Rate Risk Management Policy.
As disclosed in the Company's Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $9.2 million during 2002. Net cash used in investing activities of $28.1 million consisted primarily of a net change in loans of $42.1 million and securities purchased of $48.3 million funded by sales, maturities and paydowns of investment securities of $63.8 million. Net cash provided by financing activities amounted to $19.2 million, consisting of a $25.5 million net increase in deposits and a $5.1 million net decrease in FHLB borrowings.
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 5 presents an
interest rate sensitivity analysis for the interest-earning assets and
interest-bearing liabilities for the year ended December 31, 2002.
TABLE 5 - 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 $ 397,850 5,732 10,577 76,819 35,392 $526,370
Mortgage loans available for sale 5,065 - - - - 5,065
Investment securities 3,000 1,945 1,194 3,874 61,723 71,736
Federal funds sold 1,774 - - - - 1,774
Interest-bearing deposit account -FHLB 143 - - - - 143
Other interest-earning assets - - - - 3,531 3,531
--------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 407,832 7,677 11,771 80,693 100,646 $608,619
--------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
NOW, savings, and money market deposits $ 156,554 - - - - $156,554
Time deposits 20,061 73,162 121,775 76,788 - 291,786
Other short term borrowings 1,780 - - - - 1,780
FHLB borrowings - 71 5,000 5,000 53,000 63,071
Trust preferred securities - 14,000 - - - 14,000
--------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 178,395 87,233 126,775 81,788 53,000 $527,191
--------------------------------------------------------------------------------
INTEREST-SENSITIVE GAP $ 229,437 (79,556) (115,004) (1,095) 47,646 $ 81,428
CUMULATIVE INTEREST-SENSITIVE GAP $ 229,437 149,881 34,877 33,782 81,428
--------------------------------------------------------------------------------
CUMULATIVE INTEREST-SENSITIVE GAP
TO TOTAL INTEREST-EARNING ASSETS 37.70% 24.63% 5.73% 5.55% 13.38%
|
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 with contractual maturities 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, time deposits and borrowed funds. At December 31, 2002, 73% of the Company's interest-earning assets could be repriced within one year, compared to 74% of interest-bearing liabilities. Rate sensitive assets at December 31, 2002 totaled $608.6 million, exceeding rate sensitive liabilities of approximately $527.2 million by $81.4 million.
INTEREST RATE 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 monthly 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 December 31, 2002, the Company had two interest rate swap contracts outstanding, accounted for as cash flow hedges. Under the first swap agreement, the Company received 6.33% and paid 4.25% (based on the prime rate at December 31, 2002) on a notional amount of $40.0 million. The swap agreement matures in June 2004. Under the second swap agreement, the Company received 6.05% and paid 4.25% (based on the prime rate at December 31, 2002) on a notional amount of $20.0 million. The swap agreement matures in July 2004. Management believes that the risk associated with using this type of derivative financial instrument to mitigate interest rate risk should not have any material unintended impact on the Company's financial condition or results of operations.
An analysis of the Company's financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities, and a discussion of these changes and trends follows.
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES
All of the Company's investment securities are held in the
available-for-sale ("AFS") category. At December 31, 2002 the market value of
AFS securities totaled $71.7 million, compared to $84.3 million and $71.6
million at December 31, 2001 and 2000, respectively. Table 6 presents the
market value of the presently held AFS securities for the years ended December
31, 2002, 2001 and 2000.
TABLE 6 - SUMMARY OF INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS) 2002 2001 2000
==========================================================================
Obligations of United States government
agencies and corporations $ - - 25,119
Obligations of states and political subdivisions $14,350 16,404 22,228
Mortgage backed securities $52,386 63,382 24,218
Trust preferred securities $ 5,000 4,500 -
-----------------------
TOTAL SECURITIES $71,736 84,286 71,565
=======================
|
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, U.S. government agency sponsored mortgage-backed securities and trust preferred securities. AFS securities averaged $77.4 million in 2002, $84.5 million in 2001 and $66.2 million in 2000. Table 7 presents the AFS securities held by the Company by maturity category at December 31, 2002. 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 7 - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD ON INVESTMENTS
AFTER ONE YEAR AFTER 5 YEARS
ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS AFTER 10 YEARS TOTALS
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
==================================================================================================================================
BOOK VALUE:
States and political subdivisions $ 2,117 6.92% 3,628 6.95% 3,802 5.79% 4,340 7.11% $ 13,887 6.68%
Mortgage backed securities $ - - - - 1,009 4.42% 51,024 5.48% $ 52,033 5.46%
Trust preferred securities $ - - - - - - 5,000 5.81% $ 5,000 5.81%
------- ------- ------- ------- --------
TOTAL SECURITIES $ 2,117 6.92% 3,628 6.95% 4,811 5.50% 60,364 5.14% $ 70,920 5.31%
======= ======= ======= ======= ========
|
LOANS
The loan portfolio is the largest category of the Company's earning 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.
The composition of the Company's loan portfolio is presented in Table 8.
TABLE 8 - LOAN PORTFOLIO
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS AMOUNT % OF LOANS
-------------------------------- -------- ----------- ------- ----------- ------- ----------- ------- -----------
BREAKDOWN OF LOAN RECEIVABLES:
Commercial $ 92,141 17.51% 102,409 20.87% 96,882 23.58% 83,644 24.66%
Real estate - mortgage 322,987 61.36% 277,737 56.61% 229,260 55.79% 190,921 56.29%
Real estate - construction 80,552 15.30% 82,791 16.88% 58,939 14.34% 39,340 11.60%
Consumer 30,690 5.83% 27,671 5.64% 25,858 6.29% 25,293 7.46%
-------- ----------- ------- ----------- ------- ----------- ------- -----------
TOTAL LOANS $526,370 100.00% 490,608 100.00% 410,939 100.00% 339,198 100.00%
Less: Allowance for loan losses $ 7,248 6,091 4,713 3,924
-------- ------- ------- -------
NET LOANS $519,122 484,517 406,226 335,274
======== ======= ======= =======
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS) AMOUNT % OF LOANS
-------------------------------- ------- -----------
BREAKDOWN OF LOAN RECEIVABLES:
Commercial 89,536 29.68%
Real estate - mortgage 157,167 52.11%
Real estate - construction 29,927 9.92%
Consumer 24,995 8.29%
------- -----------
TOTAL LOANS 301,625 100.00%
Less: Allowance for loan losses 4,137
-------
NET LOANS 297,488
=======
|
As of December 31, 2002, gross loans outstanding were $526.4 million, an increase of $35.8 million or 7% over the December 31, 2001 balance of $490.6 million. Most of this growth was attributable to growth in real estate mortgage loans. Real estate mortgage loans grew $45.3 million in 2002, while real estate construction loans decreased $2.2 million in 2002. The Company experienced a decrease of $10.3 million in the commercial loan portfolio. As a percentage of the Company's total loan portfolio, real estate mortgage loans represented 61.36% in 2002, 56.61% in 2001 and 55.79% in 2000. Over the same period commercial loans represented 17.51%, 20.87% and 23.58% of the Company's total loan portfolio, respectively. Real estate construction loans made up 15.30%, 16.88% and 14.34% of the Company's total loan portfolio at December 31, 2002, 2001 and 2000, respectively. Consumer loans represented 5.83%, 5.64% and 6.29% of the Company's total loan portfolio at December 31, 2002, 2001 and 2000, respectively.
Mortgage loans held for sale were $5.1 million at December 31, 2002, a decrease of $274,000 from the December 31, 2001 balance of $5.3 million which represented an increase of $3.8 million over the December 31, 2000 balance of $1.6 million.
Table 9 identifies the maturities of all loans as of December 31, 2002 and addresses the sensitivity of these loans to changes in interest rates.
TABLE 9 - 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 $ 81,783 8,949 1,409 $ 92,141
Real estate - mortgage 241,983 50,514 30,490 322,987
Real estate - construction 75,355 5,017 180 80,552
Consumer 15,038 12,339 3,313 30,690
-----------------------------------------------------
TOTAL LOANS $ 414,159 76,819 35,392 $ 526,370
=====================================================
Total fixed rate loans $ 18,510 76,503 35,392 $ 130,405
Total floating rate loans 395,649 316 - 395,965
-----------------------------------------------------
TOTAL LOANS $ 414,159 76,819 35,392 $ 526,370
=====================================================
|
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, 2002, outstanding loan commitments totaled $101.4 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additional information regarding commitments is provided in note 10 to the consolidated financial statements.
Table 10 identifies the Company's commitments as of December 31, 2002 and 2001.
TABLE 10 - COMMITMENTS
CONTRACTUAL AMOUNT
(DOLLARS IN THOUSANDS) 2002 2001
=========================================================
FINANCIAL INSTRUMENTS WHOSE CONTRACT
AMOUNTS REPRESENT CREDIT RISK:
Commitments to extend credit $101,401 91,822
Standby letters of credit and
financial guarantees written $ 2,061 1,667
|
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. The allowance is the total of specific reserves allocated to significant individual credits plus a general reserve. After individual loans with specific allocations have been deducted, the general reserve is calculated by applying general reserve percentages to the nine risk grades within the portfolio. Loans are categorized as one of nine risk grades based on management's assessment of the overall credit quality of the loan, including payment history, financial position of the borrower, underlying collateral and internal credit review. The general reserve percentages are determined by management based on its evaluation of losses inherent in the various risk grades of loans. 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.
Specific reserves are 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, 2002 and 2001, the recorded investment in loans that were considered to be impaired under SFAS No. 114 was approximately $4.8 million and $4.4 million, respectively, with related allowance for loan losses of approximately $676,000 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. 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 results of the Bank's loan grading system.
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 given their analysis of incurred loan losses.
The Company grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, and Lincoln counties and portions of Iredell and Gaston 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, 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.
Net charge-offs for 2002 were $4.3 million. The ratio of net charge-offs to average total loans was 0.84% in 2002, 0.48% in 2001 and 0.29% in 2000. Charge-offs in 2002 included $2.8 million due to losses on two large commercial relationships. One business was an air charter, which was effected by the attacks on September 11, 2001 and the second was a textile manufacturer whose competition moved off-shore, which caused a significant reduction in revenues for their products. The allowance for loan losses increased to $7.2 million or 1.38% of total loans outstanding at December 31, 2002. For December 31, 2001 and 2000, the allowance for loan losses amounted to $6.1 million, or 1.24% of total loans outstanding and $4.7 million, or 1.15% of total loans outstanding, respectively. This increase in the allowance for loan losses is attributable to higher levels of loans included in the risk grades Watch, Substandard, Low Substandard, Doubtful and Loss, which are the risk grades given to loans with a greater risk of loss. The increase in Watch and Substandard is due to the adverse impact of the slow economy.
Table 11 presents the percentage of loans assigned to each risk grade along with the general reserve percentage applied to loans in each risk grade at December 31, 2002 and 2001:
TABLE 11 - LOAN RISK GRADE ANALYSIS
PERCENTAGE OF LOANS GENERAL RESERVE
BY RISK GRADE PERCENTAGE
RISK GRADE 2002 2001 2002 2001
=========================================================================
Risk 1 (Excellent Quality) 8.92% 8.63% 0.15% 0.15%
Risk 2 (High Quality) 33.19% 41.14% 0.50% 0.50%
Risk 3 (Good Quality) 46.28% 43.05% 1.00% 1.00%
Risk 4 (Management Attention) 5.33% 3.93% 2.50% 2.50%
Risk 5 (Watch) 3.32% 1.10% 7.00% 7.00%
Risk 6 (Substandard) 2.04% 1.35% 12.00% 12.00%
Risk 7 (Low Substandard) 0.03% 0.02% 25.00% 25.00%
Risk 8 (Doubtful) 0.00% 0.00% 50.00% 50.00%
Risk 9 (Loss) 0.01% 0.00% 100.00% 100.00%
|
At December 31, 2002, there were three relationships totaling $10.9 million in the Watch risk grade and four relationships totaling $8.9 million in the Substandard risk grade that exceeded $1 million.
Table 12 presents an analysis of the allowance for loan losses, including charge-off activity.
TABLE 12 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS) DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
==============================================================================================================================
Reserve for loan losses at beginning $ 6,091 4,713 3,924 4,137
Loans charged off:
Commercial 3,737 842 857 485
Real estate - mortgage 158 790 10 25
Real estate - construction - 51 36 -
Consumer 546 675 255 195
-------------------------------------------------------------------------------
TOTAL LOANS CHARGED OFF $ 4,441 2,358 1,158 705
-------------------------------------------------------------------------------
Recoveries of losses previously charged off:
Commercial 40 84 20 24
Real estate - mortgage - - - -
Real estate - construction 4 6 - -
Consumer 122 101 48 43
-------------------------------------------------------------------------------
TOTAL RECOVERIES $ 166 191 68 67
-------------------------------------------------------------------------------
NET LOANS CHARGED OFF $ 4,275 2,167 1,090 638
Provision for loan losses 5,432 3,545 1,879 425
-------------------------------------------------------------------------------
RESERVE FOR LOAN LOSSES AT END OF YEAR $ 7,248 6,091 4,713 3,924
===============================================================================
Loans charged off net of recoveries, as
a percent of average loans outstanding 0.84% 0.48% 0.29% 0.20%
(DOLLARS IN THOUSANDS) DECEMBER 31, 1998
=================================================================
Reserve for loan losses at beginning 4,375
Loans charged off:
Commercial 608
Real estate - mortgage -
Real estate - construction -
Consumer 138
------------------
TOTAL LOANS CHARGED OFF 746
------------------
Recoveries of losses previously charged off:
Commercial 39
Real estate - mortgage -
Real estate - construction -
Consumer 24
------------------
TOTAL RECOVERIES 63
------------------
NET LOANS CHARGED OFF 683
Provision for loan losses 445
------------------
RESERVE FOR LOAN LOSSES AT END OF YEAR 4,137
==================
Loans charged off net of recoveries, as
a percent of average loans outstanding 0.25%
|
NON-PERFORMING ASSETS
Non-performing assets, comprised of non-accrual loans, other real estate
owned, other repossessed assets and loans for which payments are more than 90
days past due totaled $6.6 million at December 31, 2002 compared to $4.7 million
at December 31, 2001. This increase is attributable to customers that were
adversely impacted by the slowdown in area businesses. Repossessed assets as of
December 31, 2002 consisted of three aircraft taken in collection of loans.
At December 31, 2002 the Company had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $4.8 million or 0.92% of total loans. Non-performing loans for 2001 were $4.4 million, or 0.90% of total loans and $6.0 million, or 1.45% of total loans for 2000. Interest that would have been recorded on non-accrual loans for the years ended December 31, 2002, 2001 and 2000, had they performed in accordance with their original terms, amounted to approximately $484,000, $695,000 and $508,000 respectively. Interest income on impaired loans included in the results of operations for 2002, 2001, and 2000 amounted to approximately $22,000, $38,000 and $94,000, 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.
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. Generally a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected.
A summary of non-performing assets at December 31 for each of the years presented is shown in table 13.
TABLE 13 - NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998
===========================================================================================
Nonaccrual loans $4,602 3,756 5,421 2,866 3,292
Loans 90 days or more past due and still accruing 238 655 545 645 328
---------------------------------------
TOTAL NON-PERFORMING LOANS 4,840 4,411 5,966 3,511 3,620
All other real estate owned 240 256 112 44 545
All other repossessed assets 1,538 4 3 - -
---------------------------------------
TOTAL NON-PERFORMING ASSETS $6,618 4,671 6,081 3,555 4,165
=======================================
AS A PERCENT OF TOTAL LOANS AT YEAR END
Non-accrual loans 0.87% 0.77% 1.32% 0.84% 1.09%
Loans 90 days or more past due and still accruing 0.05% 0.13% 0.13% 0.19% 0.11%
Total non-performing assets 1.26% 0.95% 1.48% 1.05% 1.38%
|
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 time
deposits. As of December 31, 2002, total deposits were $515.7 million, an
increase of $25.5 million or 5% increase over the December 31, 2001 balance of
$490.2 million. The increase in deposits is primarily attributable to growth in
core deposits to $354.9 million at December 31, 2002 from $334.1 million at
December 31, 2001, which resulted from deposit campaigns throughout 2002.
Time deposits in amounts of $100,000 or more totaled $160.8 million at December 31, 2002, $156.0 million and $129.1 million at December 31, 2001 and 2000, respectively. At December 31, 2002, brokered deposits amounted to $39.9 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. Brokered deposits are generally considered to be more susceptible to withdrawal as a result of interest rate changes and to be a less stable source of funds, as compared to deposits from the local market.
Table 14 is a summary of the maturity distribution of time deposits in amounts of $100,000 or more as of December 31, 2002.
TABLE 14 - MATURITIES OF TIME DEPOSITS OVER $100,000
(DOLLARS IN THOUSANDS) 2002
================================================
Three months or less $ 35,591
Over three months through six months 35,822
Over six months through twelve months 44,413
Over twelve months 45,011
--------
TOTAL $160,837
========
|
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, 2002, FHLB borrowings totaled $63.1
million compared to $68.2 million at December 31, 2001 and $21.4 million at
December 31, 2000. Average FHLB borrowings for 2002 were $61.0 million, compared
to average balances of $42.5 million for 2001 and $15.8 million for 2000. The
maximum amount of outstanding FHLB borrowings was $74.2 million in 2002, and
$68.2 in 2001 and $21.4 in 2000. The FHLB advances outstanding at December 31,
2002 had both fixed and adjustable interest rates ranging from 1.30% to 6.49%.
Approximately $5.1 million of the FHLB advances outstanding have contractual
maturities prior to December 31, 2003. As of December 31, 2002, the Company had
$52.0 million in convertible FHLB advances. Additional information regarding
FHLB advances is provided in note 6 to the consolidated financial statements.
Demand notes payable to the U. S. Treasury, which represent treasury tax and loan payments received from customers, amounted to approximately $1.6 million, $118,000 and $1.6 million at December 31, 2002, 2001 and 2000, respectively.
The Company had no federal funds purchased as of December 31, 2002, 2001 or 2000.
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, 2002 was $48.6 million compared to
$45.4 million and $43.0 million at December 31, 2001 and 2000, respectively. At
December 31, 2002, unrealized gains and losses, net of taxes, amounted to a gain
of approximately $1.4 million. For the years ended December 31, 2001 and 2000,
unrealized gains and losses, net of taxes, amounted to a loss of approximately
$922,000 and a gain of approximately $4,000, 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 7.72%, 8.25% and 9.13% for 2002, 2001 and 2000. The
return on average shareholders' equity was 7.12% at December 31, 2002 as
compared to 9.65% and 12.55% as of December 31, 2001 and December 31, 2000,
respectively. Total cash dividends paid during 2002 amounted to $1.3 million, a
decrease of 2% from 2001. This decrease is attributable to a reduction in
shares outstanding due to stock repurchase activity. The
Company repurchased $1.3 million, or 85,500 shares of its common stock during 2002 as part of the stock repurchase plan implemented in February 2002. The Company's Board of Directors has authorized aggregate repurchases of up to $3.0 million through February 3, 2003.
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 and trust preferred securities less all intangible assets and goodwill. Tier 1 capital at December 31, 2002 includes $14.0 million in trust preferred securities. The Company's Tier I capital ratio was 10.76%, 11.14% and 10.11% at December 31, 2002, 2001 and 2000, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company's allowance for loan losses, not exceeding 1.25% of the Company's risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company's total risk-based capital ratio was 12.01%, 12.27% and 11.22% at December 31, 2002, 2001 and 2000, respectively. In addition to the Tier I and total risk-based capital requirements, financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company's Tier I leverage capital ratio was 9.78%, 10.46% and 9.10% at December 31, 2002, 2001 and 2000, respectively.
A bank is considered to be "well capitalized" if it has a total risk-based capital ratio of 10.0 % or greater, a Tier I risk-based capital ratio of 6.0% or greater, and has a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be "well capitalized" at December 31, 2002, 2001 and 2000.
The Company's key equity ratios as of December 31, 2002, 2001 and 2000 are
presented in Table 15.
TABLE 15 - EQUITY RATIOS
YEARS ENDED DECEMBER 31,
2002 2001 2000
========================================================
Return on average assets 0.55% 0.80% 1.15%
Return on average equity 7.12% 9.65% 12.55%
Dividend payout ratio 36.58% 28.14% 23.39%
Average equity to average assets 7.72% 8.25% 9.13%
|
QUARTERLY FINANCIAL DATA
The Company's consolidated quarterly operating results for the years ended
December 31, 2002 and 2001 are presented in table 16. The increase in provision
for loan losses in fourth quarter 2002 and 2001 reflects the charge off of large
commercial loans during fourth quarter.
TABLE 16 - QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, 2002 2001
EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
=========================================================================================
Total interest income $9,089 9,138 9,345 9,052 10,935 10,849 10,568 9,546
Total interest expense 4,607 4,127 3,639 3,404 5,905 5,998 5,952 5,172
----------------------------- ------------------------------
NET INTEREST INCOME 4,482 5,011 5,706 5,648 5,030 4,851 4,616 4,374
Provision for loan losses 500 1,266 1,578 2,088 429 453 760 1,903
Other income 1,524 1,406 2,070 1,491 1,602 1,990 2,110 2,561
Other expense 4,215 4,193 4,194 4,156 4,160 4,370 3,864 4,358
----------------------------- ------------------------------
INCOME BEFORE INCOME TAXES 1,291 958 2,004 895 2,043 2,018 2,102 674
Income taxes 405 312 710 285 672 668 716 206
----------------------------- ------------------------------
NET EARNINGS $ 886 646 1,294 610 1,371 1,350 1,386 468
============================= ==============================
BASIC EARNINGS PER SHARE $ 0.28 0.21 0.41 0.19 0.42 0.42 0.43 0.15
============================= ==============================
DILUTED EARNINGS PER SHARE $ 0.28 0.20 0.41 0.19 0.42 0.42 0.43 0.14
============================= ==============================
|
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.
The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The structure of the Company's loan and deposit portfolios is such that a significant decline (increase) in interest rates may adversely impact net market values and interest income. Management seeks to manage the risk through the utilization of its investment securities and off balance sheet derivative instruments. During the years ended December 31, 2002, 2001 and 2000, the Company used interest rate contracts to manage market risk. During 2002, the Company entered into interest rate swap agreements under which the Company pays a variable rate and receives a fixed rate. At December 31, 2002, the Company had two interest rate contracts outstanding, accounted for as cash flow hedges. Under the first swap agreement, the Company received 6.33% and paid 4.25% (based on the prime rate at December 31, 2002) on a notional amount of $40.0 million. The swap agreement matures in June 2004. Under the second swap agreement, the Company received 6.05% and paid 4.25% (based on the prime rate at December 31, 2002) on a notional amount of $20.0 million. The swap agreement matures in July 2004. For the year ended December 31, 2002, the Company recognized approximately $508,000 in interest income related to the two interest rate swap agreements. 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 year ended December 31, 2001 the Company recognized no interest expense related to derivative financial instruments. The Company expensed $3,200 for the year ended December 31, 2000 related to derivative financial instruments.
Table 17 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, 2002. 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, 2002. As of December 31, 2002, all fixed rate advances are callable at the option of FHLB. In the current rate environment management does not anticipate these to be called. 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 17- MARKET RISK TABLE
(DOLLARS IN THOUSANDS) PRINCIPAL/NOTIONAL AMOUNT MATURING IN YEAR ENDED DECEMBER 31,
LOANS RECEIVABLE 2003 2004 2005 2006 & 2007 THEREAFTER TOTAL FAIR VALUE
====================================================================================================================
Fixed rate $ 21,453 20,858 21,239 25,093 35,123 $123,766 $ 120,159
Average interest rate 9.21% 8.49% 7.91% 7.48% 8.40%
Variable rate $174,339 46,009 39,679 61,393 81,184 $402,604 $ 407,690
Average interest rate 4.99% 5.08% 5.24% 5.14% 5.12%
INVESTMENT SECURITIES .
====================================================================================================================
Interest bearing cash $ - - - - 143 $ 143 $ 143
Average interest rate - - - - 1.19%
Federal funds sold $ 1,774 - - - - $ 1,774 $ 1,774
Average interest rate 1.27% - - - -
Securities available for sale $ 2,933 4,304 988 3,575 59,936 $ 71,736 $ 71,736
Average interest rate 4.91% 5.17% 4.94% 6.04% 5.35%
Nonmarketable equity securities $ - - - - 4,346 $ 4,346 $ 4,346
Average interest rate - - - - 4.01%
DEBT OBLIGATIONS
====================================================================================================================
Deposits $241,773 57,912 7,047 6,550 202,457 $515,739 $ 517,298
Average interest rate 2.46% 3.13% 3.92% 4.79% 0.59%
Advances from FHLB $ 5,071 6,000 35,000 - 17,000 $ 63,071 $ 63,359
Average interest rate 1.364% 1.860% 4.076% - 6.075%
Demand notes payable to U.S. Treasury $ 1,600 - - - - $ 1,600 $ 1,600
Average interest rate 1.05% - - - -
Trust preferred securities $ - - - - 14,000 $ 14,000 $ 14,000
Average interest rate - - - - 5.25%
|
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., Sterne Agee & Leach, Inc. 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 February 28, 2003, the Company had 676 shareholders of record, not including the number of persons or entities whose stock is held in nominee or street name through various brokerage firms or banks. The market price for the Company's common stock was $14.40 on February 28, 2003.
Following is certain market and dividend information for the last two fiscal years. 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
2002 LOW BID HIGH BID PER SHARE
First Quarter $ 14.450 $ 16.250 $ 0.10
Second Quarter $ 16.050 $ 17.720 $ 0.10
Third Quarter $ 12.860 $ 16.450 $ 0.10
Fourth Quarter $ 13.170 $ 14.800 $ 0.10
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
|
DIRECTORS AND OFFICERS OF THE COMPANY
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
/s/ Porter Keadle Moore, LLP Atlanta, Georgia January 17, 2003 |
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
Assets
------
Cash and due from banks, including reserve requirements
of $2,633,000 and $2,246,000 $ 13,803,665 13,042,320
Federal funds sold 1,774,000 2,261,000
------------ ------------
Cash and cash equivalents 15,577,665 15,303,320
Investment securities available for sale 71,735,705 84,286,037
Other investments 4,345,573 4,602,773
Mortgage loans held for sale 5,064,635 5,338,931
Loans, net 519,121,840 484,517,151
Premises and equipment, net 15,620,977 14,679,191
Cash surrender value of life insurance 4,828,708 4,583,000
Accrued interest receivable and other assets 8,446,435 6,194,301
------------ ------------
$644,741,538 619,504,704
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 67,398,458 56,826,130
Interest-bearing 448,340,497 433,397,059
------------ ------------
Total deposits 515,738,955 490,223,189
Demand notes payable to U. S. Treasury 1,600,000 117,987
Accrued interest payable and other liabilities 1,726,421 1,548,139
Federal Home Loan Bank advances 63,071,429 68,214,286
Guaranteed preferred beneficial interests in Company's junior
subordinated debentures (Trust Preferred Securities) 14,000,000 14,000,000
------------ ------------
Total liabilities 596,136,805 574,103,601
------------ ------------
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;
3,133,547 and 3,218,714 shares issued and outstanding 35,097,773 36,407,798
Retained earnings 12,094,363 9,915,399
Accumulated other comprehensive income (loss) 1,412,597 (922,094)
------------ ------------
Total shareholders' equity 48,604,733 45,401,103
------------ ------------
$644,741,538 619,504,704
============ ============
|
See accompanying notes to consolidated financial statements.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ---------- -----------
Interest income:
Interest and fees on loans $ 32,038,359 36,512,395 36,423,973
Interest on federal funds sold 45,271 126,791 281,659
Interest and dividends on securities:
U. S. Treasuries - - 16,572
U. S. Government agencies 3,439,814 3,918,551 2,977,459
State and political subdivisions 613,219 911,707 988,020
Other 487,284 428,157 171,600
------------ ---------- -----------
Total interest income 36,623,947 41,897,601 40,859,283
------------ ---------- -----------
Interest expense:
Deposits 12,364,245 20,790,136 18,326,359
Federal Home Loan Bank advances 2,658,742 2,118,511 974,036
Other 754,344 117,849 131,705
------------ ---------- -----------
Total interest expense 15,777,331 23,026,496 19,432,100
------------ ---------- -----------
Net interest income 20,846,616 18,871,105 21,427,183
Provision for loan losses 5,431,600 3,545,322 1,879,100
------------ ---------- -----------
Net interest income after provision for loan losses 15,415,016 15,325,783 19,548,083
------------ ---------- -----------
Other income:
Service charges on deposit accounts 3,060,581 2,805,492 1,588,390
Other service charges and fees 503,165 471,998 367,352
Gain (loss) on sale of securities 625,616 1,613,992 (483,472)
Mortgage banking income 702,290 1,014,043 241,007
Insurance and brokerage commissions 477,765 348,582 168,557
Miscellaneous 1,121,198 2,008,797 2,033,930
------------ ---------- -----------
Total other income 6,490,615 8,262,904 3,915,764
------------ ---------- -----------
Other expenses:
Salaries and employee benefits 9,569,016 9,115,496 8,899,285
Occupancy 3,142,712 2,984,100 2,509,720
Other operating 4,046,347 4,652,197 4,099,972
------------ ---------- -----------
Total other expenses 16,758,075 16,751,793 15,508,977
------------ ---------- -----------
Earnings before income taxes 5,147,556 6,836,894 7,954,870
Income tax expense 1,712,000 2,261,542 2,576,400
------------ ---------- -----------
Net earnings $ 3,435,556 4,575,352 5,378,470
============ ========== ===========
Basic and diluted earnings per share $ 1.09 1.42 1.67
============ ========== ===========
|
See accompanying notes to consolidated financial statements.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Common Stock Other
------------------------ Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
---------- ------------ ----------- ------------- -----------
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 accumulated other
comprehensive income (loss), 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 accumulated other
comprehensive income (loss), 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
Cash dividends declared ($0.40 per share) - - (1,256,592) - (1,256,592)
Repurchase and retirement of common
stock (85,500) (1,314,250) - - (1,314,250)
Exercise of stock options 333 4,225 - - 4,225
Net earnings - - 3,435,556 - 3,435,556
Change in accumulated other
comprehensive income (loss), net of tax - - - 2,334,691 2,334,691
---------- ------------ ----------- ------------- -----------
Balance, December 31, 2002 3,133,547 $35,097,773 12,094,363 1,412,597 48,604,733
========== ============ =========== ============= ===========
|
See accompanying notes to consolidated financial statements.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- ---------
Net earnings $3,435,556 4,575,352 5,378,470
----------- ----------- ---------
Other comprehensive income:
Unrealized holding gains on securities available for sale 2,951,843 97,560 1,030,186
Reclassification adjustment for (gains) losses on
sales of securities available for sale (625,616) (1,613,992) 483,472
Unrealized holding gains on derivative financial instruments
qualifying as cash flow hedges 1,498,000 - -
----------- ----------- ---------
Total other comprehensive income (loss),
before income taxes 3,824,227 (1,516,432) 1,513,658
----------- ----------- ---------
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding gains on securities available for sale 1,149,742 38,000 401,258
Reclassification adjustment for (gains) losses on
sales of securities available for sale (243,677) (628,650) 188,312
Unrealized holding gains on derivative financial instruments
qualifying as cash flow hedges 583,471 - -
----------- ----------- ---------
Total income tax expense (benefit) related to
other comprehensive income 1,489,536 (590,650) 589,570
----------- ----------- ---------
Total other comprehensive income (loss),
net of tax 2,334,691 (925,782) 924,088
----------- ----------- ---------
Total comprehensive income $5,770,247 3,649,570 6,302,558
=========== =========== =========
|
See accompanying notes to consolidated financial statements.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------- ------------
Cash flows from operating activities:
Net earnings $ 3,435,556 4,575,352 5,378,470
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion 1,685,715 1,584,437 1,531,860
Provision for loan losses 5,431,600 3,545,322 1,879,100
Deferred income tax benefit (318,921) (532,329) (246,511)
Loss (gain) on sale of investment securities (625,616) (1,613,992) 483,472
Gain on sale of premises and equipment - - (598,308)
Loss (gain) on sale of mortgage loans (28,835) (37,152) 292,796
Loss (gain) on sale of other real estate (19,981) 51,840 (9,226)
Change in:
Cash surrender value of life insurance (245,708) - -
Other assets (595,240) 1,017,755 (1,090,782)
Other liabilities 178,282 (1,384,145) 1,230,278
Mortgage loans held for sale 303,131 (3,738,079) (171,024)
------------- ------------- ------------
Net cash provided by operating activities 9,199,983 3,469,009 8,680,125
------------- ------------- ------------
Cash flows from investing activities:
Purchase of investment securities available for sale (48,339,951) (118,372,897) (33,291,361)
Proceeds from calls and maturities of investment securities
available for sale 28,609,785 22,714,408 7,139,920
Proceeds from sales of investment securities available for sale 35,191,263 82,969,419 18,129,483
Change in other investments 257,200 (2,203,900) (1,053,773)
Purchase of cash surrender value of life insurance - (4,583,000) -
Net change in loans (42,113,346) (82,092,812) (72,926,623)
Purchases of premises and equipment (2,614,380) (3,652,961) (2,243,860)
Proceeds from sale of premises and equipment 412,289 645,429 1,916,505
Construction in progress - (100,633) (3,779,053)
Proceeds from sale of other real estate 488,647 60,310 36,426
------------- ------------- ------------
Net cash used by investing activities (28,108,493) (104,616,637) (86,072,336)
------------- ------------- ------------
Cash flows from financing activities:
Net change in deposits 25,515,766 40,149,847 73,438,973
Net change in demand notes payable to U. S. Treasury 1,482,013 (1,482,013) -
Proceeds from FHLB borrowings 68,100,000 51,000,000 18,000,000
Repayments of FHLB advances (73,242,857) (4,142,856) (11,142,858)
Proceeds from issuance of trust preferred securities - 14,000,000 -
Transaction costs associated with trust preferred securities (105,450) (425,741) -
Cash dividends (1,256,592) (1,287,486) (1,258,243)
Cash paid in lieu of fractional shares - - (3,775)
Proceeds from exercise of stock options 4,225 - -
Common stock repurchased (1,314,250) - -
------------- ------------- ------------
Net cash provided by financing activities 19,182,855 97,811,751 79,034,097
------------- ------------- ------------
Net change in cash and cash equivalents 274,345 (3,335,877) 1,641,886
Cash and cash equivalents at beginning of year 15,303,320 18,639,197 16,997,311
------------- ------------- ------------
Cash and cash equivalents at end of year $ 15,577,665 15,303,320 18,639,197
============= ============= ============
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $16,006,155 23,068,630 18,952,793
Income taxes $ 2,235,500 3,209,000 2,663,000
Noncash investing and financing activities:
Change in other comprehensive income, net of tax $ 2,334,691 (925,782) 924,088
Transfer of loans to other real estate and repossessions $ 2,077,057 256,439 95,000
|
See accompanying notes to consolidated financial statements.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 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 and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.
Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, 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.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 and interest is recognized on a cash basis 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 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 new servicing assets of approximately $37,600, $61,000 and $172,000 during 2002, 2001 and 2000, respectively, and amortized approximately $310,000, $196,000 and $220,000 during 2002, 2001 and 2000, respectively.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Buildings and improvements 10 - 50 years Furniture and equipment 3 - 10 years |
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.
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.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 subsequent to 1999 vest over a three-year period. All options expire after ten years. A summary of the activity in the Plan is presented below:
2002 2001 2000
----------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Option Price Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share
-------- ------------- ------- ------------- ------ -------------
Outstanding, beginning of year 139,703 $ 14.82 77,598 $ 14.00 27,657 $ 16.36
Granted during the year 67,550 $ 14.10 62,105 $ 15.86 49,941 $ 12.69
Forfeited during the year (8,241) $ 14.78 - - - -
Exercised during the year (333) $ 12.69 - - - -
-------- ------------- ------- ------------- ------ -------------
Outstanding, end of year 198,679 $ 14.58 139,703 $ 14.82 77,598 $ 14.00
======== ============= ======= ============= ====== =============
Number of shares exercisable 66,292 $ 14.49 27,709 $ 14.15 5,530 $ 16.36
======== ============= ======= ============= ====== =============
|
The weighted average grant-date fair value of options granted in 2002, 2001 and 2000 was $6.60, $10.40, and $6.24, respectively. Options outstanding at December 31, 2002 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 nine years.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2002 2001 2000
----------- ---------- ----------
Net earnings As reported $3,435,556 4,575,352 5,378,470
Effect of grants, net of tax (276,415) (400,453) (193,212)
Effect of forfeitures, net of tax 42,982 - -
----------- ---------- ----------
Proforma $3,202,123 4,174,899 5,185,258
Basic earnings per share As reported $ 1.09 1.42 1.67
Proforma $ 1.02 1.30 1.61
Diluted earnings per share As reported $ 1.09 1.42 1.67
Proforma $ 1.01 1.29 1.61
|
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 2002, 2001 and 2000, respectively - dividend yield of 2.8%, 2.8% and 2.9%, respectively; risk free interest rate of 4%, 5% and 7%, respectively; expected volatility of 0.53, 0.90 and 0.55, respectively; and an expected life of 10 years.
The reconciliations of the amounts used in the computation of both "basic earnings per share" and "diluted earnings per share" for the years ended December 31, 2002, 2001 and 2000 are as follows:
Net Common Per Share
Earnings Shares Amount
---------- --------- ----------
FOR THE YEAR ENDED DECEMBER 31, 2002
Basic earnings per share $3,435,556 3,151,975 $ 1.09
Effect of dilutive securities:
Stock options - 7,292 -
---------- --------- ----------
Diluted earnings per share $3,435,556 3,159,267 $ 1.09
========== ========= ==========
FOR THE YEAR ENDED DECEMBER 31, 2001
Basic earnings per share $4,575,352 3,218,714 $ 1.42
Effect of dilutive securities:
Stock options - 10,215 -
---------- --------- ----------
Diluted earnings per share $4,575,352 3,228,929 $ 1.42
========== ========= ==========
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Net Common Per Share
Earnings Shares Amount
---------- --------- ----------
FOR THE YEAR ENDED DECEMBER 31, 2000
Basic earnings per share $5,378,470 3,218,714 $ 1.67
Effect of dilutive securities:
Stock options - 5,074 -
---------- --------- ----------
Diluted earnings per share $5,378,470 3,223,788 $ 1.67
========== ========= ==========
|
At December 31, 2002, 2001 and 2000, a total of 84,578, 85,614 and 27,657, potential common shares related to stock options were not included in the computation of diluted earnings per share because they would have been antidulutive.
In April 2000 the Company declared and distributed a 10% stock dividend to its shareholders. All previously reported per share amounts have been restated to reflect the stock dividend.
(2) INVESTMENT SECURITIES Investment securities available for sale at December 31, 2002 and 2001 are as follows:
December 31, 2002
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
Mortgage-backed securities $52,033,373 352,915 - 52,386,288
State and political subdivisions 13,886,496 468,367 5,446 14,349,417
Trust preferred securities 5,000,000 - - 5,000,000
----------- ---------- ---------- ----------
Total $70,919,869 821,282 5,446 71,735,705
=========== ========== ========== ==========
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
=========== ========== ========== ==========
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENT SECURITIES, CONTINUED The amortized cost and estimated fair value of investment securities available for sale at December 31, 2002, 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 $ 2,116,827 2,139,517
Due from one to five years 3,627,961 3,873,251
Due from five to ten years 3,802,255 3,916,833
Due after ten years 9,339,453 9,419,816
Mortgage-backed securities 52,033,373 52,386,288
----------- ----------
$70,919,869 71,735,705
=========== ==========
|
Proceeds from sales of securities available for sale during 2002, 2001 and 2000 were $35,191,263, $82,969,419 and $18,129,483, respectively. Gross gains of $625,616 and $1,626,583 for 2002 and 2001, respectively, along with gross losses of $12,591 and $483,472 for 2001 and 2000, respectively, were realized on those sales.
Securities with a carrying value of approximately $30,195,000 and $27,210,000 at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes as required by law.
(3) LOANS Major classifications of loans at December 31, 2002 and 2001 are summarized as follows:
2002 2001
------------ -----------
Commercial $ 92,141,135 102,409,403
Real estate - mortgage 322,986,811 277,737,352
Real estate - construction 80,552,263 82,790,441
Consumer 30,689,537 27,670,525
------------ -----------
Total loans 526,369,746 490,607,721
Less allowance for loan losses 7,247,906 6,090,570
------------ -----------
Total net loans $519,121,840 484,517,151
============ ===========
|
The Company grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina which encompasses Catawba and Alexander counties and portions of Iredell and Lincoln counties.
At December 31, 2002 and 2001, the recorded investment in loans that were considered to be impaired was approximately $4,840,000 and $4,409,000, respectively, of which approximately $4,602,000 at December 31, 2002 and $3,756,000 at December 31, 2001 was on nonaccrual. In addition, the Company had approximately $238,000 and $655,000 in loans past due more than ninety days and still accruing interest at December 31, 2002 and 2001, respectively. The related allowance for loan losses on impaired loans was approximately $676,000 and $699,000 at December 31, 2002 and 2001, respectively. The average recorded investment in impaired loans for the twelve months ended December 31, 2002 and 2001 was approximately $7,220,000 and $5,743,000, respectively. For the years ended December 31, 2002, 2001 and 2000, the Company recognized approximately $22,000, $38,000 and $94,000, respectively, of interest income on impaired loans.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS, CONTINUED Changes in the allowance for loan losses were as follows:
2002 2001 2000
------------ ----------- -----------
Balance at beginning of year $ 6,090,570 4,713,227 3,924,348
Amounts charged off (4,441,007) (2,358,320) (1,158,381)
Recoveries on amounts previously charged off 166,743 190,341 68,160
Provision for loan losses 5,431,600 3,545,322 1,879,100
------------ ----------- -----------
Balance at end of year $ 7,247,906 6,090,570 4,713,227
============ =========== ===========
|
(4) PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows:
2002 2001
----------- ----------
Land $ 2,474,452 2,844,746
Buildings and improvements 11,892,203 9,847,402
Furniture and equipment 9,966,950 9,427,871
----------- ----------
24,333,605 22,120,019
Less accumulated depreciation 8,712,628 7,541,460
----------- ----------
15,620,977 14,578,559
Construction in progress - 100,632
----------- ----------
$15,620,977 14,679,191
=========== ==========
|
Depreciation expense was approximately $1,260,000, $1,337,000 and $1,139,000, for the years ended December 31, 2002, 2001 and 2000, respectively.
(5) TIME DEPOSITS The aggregate amount of time deposit accounts with a minimum denomination of $100,000 was $160,836,596 and $156,034,091 at December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of time deposits are as follows:
2003 $214,997,611
2004 55,497,758
2005 7,204,994
2006 681,976
2007 13,403,969
------------
$291,786,308
============
|
At December 31, 2002, the Company had approximately $39,873,000 in time deposits purchased through third party brokers.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) 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 1.30% to 6.49% at December 31, 2002. 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, 2002 consist of the following:
Maturity Date Call Date Rate Rate Type Amount
---------------------- ---------------------------------- ---------------- -----------
December 31, 2003 N/A 1.30% Adjustable Daily $ 5,000,000
February 3, 2003 N/A 5.86% Fixed 71,429
July 5, 2005 October 5, 2000 and every three
months thereafter 6.16% Convertible 5,000,000
March 30, 2010 March 30, 2001 and every three
months thereafter 6.02% Convertible 5,000,000
March 30, 2010 September 30, 2000 and every three
months thereafter 5.88% Convertible 5,000,000
May 24, 2010 May 24, 2001 and every three
months thereafter 6.49% Convertible 2,000,000
January 10, 2011 January 10, 2002 and every three
months thereafter 4.20% Convertible 5,000,000
May 2, 2011 May 2, 2002 and every three
months thereafter 4.055% Convertible 30,000,000
January 26, 2004 N/A 1.86% Adjustable 6,000,000
-----------
$63,071,429
===========
|
The FHLB has the option to convert $52,000,000 of the total advances outstanding into three month LIBOR-based floating rate advances. If the FHLB elects to convert the advances, the Bank may terminate the transaction without payment of a prepayment fee.
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, 2002 and 2001 the Bank owned FHLB stock amounting to $3,153,600 and $3,410,800, respectively.
(7) 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.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) 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.
(8) INCOME TAXES The provision for income taxes is summarized as follows:
2002 2001 2000
----------- ---------- ----------
Current $2,030,921 2,793,871 2,822,911
Deferred (318,921) (532,329) (246,511)
----------- ---------- ----------
$1,712,000 2,261,542 2,576,400
=========== ========== ==========
|
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:
2002 2001 2000
----------- ---------- ----------
Pre-tax income at statutory rates (34%) $1,750,169 2,324,544 2,704,656
Differences:
Tax exempt interest income (231,395) (331,035) (354,948)
Nondeductible interest and other expense 24,088 56,330 64,717
Cash surrender value of life insurance (83,541) - -
State taxes, net of federal benefit 230,088 228,147 184,204
Other, net 22,591 (16,444) (22,229)
----------- ---------- ----------
$1,712,000 2,261,542 2,576,400
=========== ========== ==========
|
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, 2002 and 2001.
2002 2001
----------- ---------
Deferred tax assets:
Allowance for loan losses $ 2,468,399 1,938,983
Amortizable intangible assets 247,405 262,652
Accrued retirement expense 214,038 92,520
Accrued contingent liabilities - 9,639
Foreclosed real estate - 16,193
Income from non-accrual loans 4,880 254,247
Unrealized loss on available for sale securities - 588,296
Other 19,040 24,520
----------- ---------
Total gross deferred tax assets 2,953,762 3,187,050
----------- ---------
Deferred tax liabilities:
Unrealized gains on available for sale securities 317,769 -
Unrealized gains on cash flow hedges 583,471 -
Deferred loan fees 1,178,321 1,225,178
Premises and equipment 321,637 133,467
Deferred income from servicing rights 273,160 378,386
----------- ---------
Total gross deferred tax liabilities 2,674,358 1,737,031
----------- ---------
Net deferred tax asset $ 279,404 1,450,019
=========== =========
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) RELATED PARTY TRANSACTIONS The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. It is the policy of the Company that loan transactions with directors and officers be made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2002:
Beginning balance $ 13,782,000
New loans 9,302,000
Repayments (10,672,000)
-------------
Ending balance $ 12,412,000
=============
|
At December 31, 2002, the Company had approximately $2,289,000 in potential problem loans to related parties, with an allowance for loan losses of approximately $275,000.
At December 31, 2002 and 2001, the Company had deposit relationships with related parties of approximately $10,041,000 and $11,955,000, respectively.
The Company also enters into contracts from time to time with certain directors for the construction of bank facilities. At December 31, 2002 and 2001, the Company had outstanding construction contracts with these directors amounting to approximately $289,000 and $1,100,000, respectively. During the year ended December 31, 2002, 2001 and 2000, total construction costs for bank facilities paid to directors were approximately $1,545,000, $1,435,000 and $2,915,000, respectively.
(10) COMMITMENTS The Company leases various office space for banking and operational facilities under operating lease arrangements. Future minimum lease payments required for all operating leases having a remaining term in excess of one year at December 31, 2002 are as follows:
Year
----
2003 $ 451,981
2004 455,159
2005 443,005
2006 357,258
2007 228,488
Thereafter 791,750
----------
Total minimum obligation $2,727,641
==========
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Total rent expense was approximately $326,000, $351,000 and $361,000, for 2002, 2001 and 2000, respectively.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) COMMITMENTS, CONTINUED The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
In most cases, the Company requires collateral or other security to support financial instruments with credit risk.
Contractual Amount
--------------------------
2002 2001
------------ ------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $101,401,000 91,822,000
Standby letters of credit and
financial guarantees written $ 2,061,000 1,667,000
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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 employment agreements with certain key employees. The agreements, among other things, include salary, bonus, incentive stock option, and change in control provisions.
The Company has $26,500,000 available for the purchase of overnight federal funds from three correspondent financial institutions.
(11) DERIVATIVES AND HEDGING TRANSACTIONS 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.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) DERIVATIVES AND HEDGING TRANSACTIONS, CONTINUED At December 31, 2002, the Company had cash flow hedges with a notional amount of $60 million. These derivative instruments consist of two interest rate swap agreements that were used to convert $60 million of floating rate loans with rates based on prime that reprice daily to a fixed rate for a period of two years ending in June 2004 and July 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, included as a component of other assets, of $1,498,000 for the fair value of these cash flow hedges resulting in an after tax increase in other comprehensive income of $914,529. As of December 31, 2002, no ineffectiveness was recorded in earnings. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness.
(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 $339,000, $318,000 and $249,000 for the years of 2002, 2001 and 2000, respectively. 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 two years of employment and graduates 20 percent each year until reaching 100 percent after six years of employment.
In 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. Expenses incurred for benefits relating to this plan were approximately $249,000 during 2002. The Company incurred no expense for benefits relating to this plan during 2001.
The Company is currently paying medical benefits for certain retired employees. Postretirement benefits expense, including amortization of the transition obligation, as applicable, was approximately $32,842, $33,484 and $30,680, for the years ended December 31, 2002, 2001 and 2000, respectively. The following table sets forth the accumulated postretirement benefit obligation as of December 31, 2002 and 2001, which represents the liability for accrued postretirement benefit costs:
2002 2001
--------- ---------
Accumulated postretirement benefit obligation $209,706 213,536
Unrecognized transition obligation - (17,407)
Unrecognized gain (loss) (37,956) (38,048)
--------- ---------
Net liability recognized $171,750 158,081
========= =========
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Under the Omnibus Stock Ownership and Long Term Incentive 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 initial value of the book value shares awarded during 1999 was determined to be $11.45 per share. The Company recorded an expense of approximately $83,000, $43,000 and $33,000 associated with the benefits of this plan in the years ended December 31, 2002, 2001 and 2000, respectively.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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, 2002, that Bancorp and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2002 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 Bank's category.
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 Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- -------- ------- --------
(dollars in thousands)
AS OF DECEMBER 31, 2002:
Total Capital (to Risk-Weighted Assets)
Consolidated $68,208 12.01% 45,449 8.00% N/A N/A
Bank $66,479 11.73% 45,337 8.00% 56,671 10.00%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $61,122 10.76% 22,725 4.00% N/A N/A
Bank $59,393 10.48% 22,668 4.00% 34,003 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $61,122 9.78% 24,989 4.00% N/A N/A
Bank $59,393 9.52% 24,943 4.00% 31,179 5.00%
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%
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(14) SHAREHOLDERS' EQUITY In February 2002 the Company's Board of Directors authorized the repurchase of up to $3,000,000 in common shares of the Company's outstanding common stock effective through the end of February 2003. During 2002, the Company repurchased a total of 85,500 shares at a total price of $1,314,250.
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, 2002, this amount was approximately $14,235,000.
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:
2002 2001 2000
------- ------- -------
Merchant processing $77,828 551,513 502,085
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(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.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 2002 and 2001 are as follows:
2002 2001
--------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
(In thousands)
Assets:
Cash and cash equivalents $ 15,578 15,578 15,303 15,303
Investment securities available for sale 71,736 71,736 84,286 84,286
Other investments 4,346 4,346 4,603 4,603
Mortgage loans held for sale 5,065 5,065 5,339 5,339
Loans 519,122 520,601 484,517 493,611
Cash surrender value of life insurance 4,829 4,829 4,583 4,583
Mortgage servicing rights 709 709 981 981
Derivative instruments 1,498 1,498 - -
Liabilities:
Deposits and demand notes payable 517,339 518,898 490,341 493,421
FHLB advances 63,071 63,359 68,214 68,497
Trust preferred securities 14,000 14,000 14,000 14,000
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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, 2002 AND 2001
2002 2001
----------- ----------
Assets
------
Cash $ 475,820 228,202
Investment in subsidiaries 61,310,019 58,421,072
Other investments 815,000 815,000
Other assets 589,645 472,872
----------- ----------
$63,190,484 59,937,146
=========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Accrued expenses $ 152,751 103,043
Junior subordinated debentures 14,433,000 14,433,000
Shareholders' equity 48,604,733 45,401,103
----------- ----------
$63,190,484 59,937,146
=========== ==========
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STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------- --------- ---------
Dividends from Bank $3,526,824 1,462,486 2,327,019
Expenses:
Interest 757,733 30,333 -
Other operating expenses 208,591 311,117 191,519
---------- --------- ---------
Total expenses 966,324 341,450 191,519
---------- --------- ---------
Earnings before income tax benefit and equity in
undistributed earnings of subsidiaries 2,560,500 1,121,036 2,135,500
Income tax benefit 320,800 131,900 74,100
---------- --------- ---------
Earnings before equity in undistributed
earnings of subsidiaries 2,881,300 1,252,936 2,209,600
Equity in undistributed earnings of subsidiaries 554,256 3,322,416 3,168,870
---------- --------- ---------
Net earnings $3,435,556 4,575,352 5,378,470
========== ========= =========
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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, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ -----------
Cash flows from operating activities:
Net earnings $ 3,435,556 4,575,352 5,378,470
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization 16,668 - -
Equity in undistributed earnings of subsidiaries (554,256) (3,322,416) (3,168,870)
Deferred income tax benefit (27,991) (28,076) (19,056)
Change in:
Accrued expenses 49,708 63,630 39,413
------------ ------------ -----------
Net cash provided by operating activities 2,919,685 1,288,490 2,229,957
------------ ------------ -----------
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)
Dividends paid (1,256,592) (1,287,486) (1,258,243)
Transaction costs associated with trust preferred securities (105,450) (425,741) -
Repurchase of common stock (1,314,250) - -
Proceeds from exercise of stock options 4,225 - -
------------ ------------ -----------
Net cash provided (used) by financing activities (2,672,067) 12,719,773 (1,262,018)
------------ ------------ -----------
Net change in cash 247,618 75,263 152,939
Cash at beginning of year 228,202 152,939 -
------------ ------------ -----------
Cash at end of year $ 475,820 228,202 152,939
============ ============ ===========
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Exhibit (21)
SUBSIDIARIES OF PEOPLES BANCORP OF NORTH CAROLINA, INC.
Peoples Bank, a commercial bank organized under the laws of North Carolina, is a subsidiary of Peoples Bancorp of North Carolina, Inc.
In December 2001, the Peoples Bancorp of North Carolina, Inc. 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.
Exhibit (99)
PEOPLES BANCORP, INC.
CERTIFICATION OF PERIODIC FINANCIAL REPORT
PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Peoples Bancorp, Inc. (the "Company") certify that the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: March 27, 2003 /s/ Tony W. Wolfe
------------------
Tony W. Wolfe
Chief Executive Officer
Dated: March 27, 2003 /s/ A. Joseph Lampron
----------------------
A. Joseph Lampron
Chief Financial Officer
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*This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.