PEOPLES BANCORP OF NORTH CAROLINA INC
10-Q, 1999-11-10
STATE COMMERCIAL BANKS
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<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                For the quarterly period ended September 30, 1999
                                               ------------------

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from _______ to ________


                        Commission File Number 000-27205
                                               --------------------




                     PEOPLES BANCORP OF NORTH CAROLINA, INC.
                     ---------------------------------------
             (Exact name of registrant as specified in its charter)


           North Carolina                               56-2132396
           --------------                               ----------
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)

         218 South Main Avenue
         Newton, North Carolina                           28658
         ----------------------                           -----
(Address of principal executive office)                 (Zip Code)


                                 (828) 464-5620
                                 --------------
              (Registrant's telephone number, including area code)

                                  Peoples Bank
                                  ------------
         (Former name, former address and former fiscal year, if changed
                              since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.     Yes      No  X
                                           ---     ---


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,926,318 shares of common stock, no par value, outstanding at November 10,
1999.
- --------------------------------------------------------------------------------
<PAGE>

                                      INDEX

PART I  -  FINANCIAL INFORMATION

Item 1.       Financial Statements

              Consolidated Balance Sheets at September 30, 1999
              (Unaudited) and December 31, 1998                              3

              Consolidated Statements of Income for the nine months ended
              September 30, 1999 and September 30, 1998 (Unaudited), and
              for the three months ended September 30, 1999 and September
              30, 1998 (Unaudited)                                           4

              Consolidated Statements of Comprehensive Income for the nine
              months ended September 30, 1999 and September 30, 1998
              (Unaudited), and for the three months ended September 30,
              1999 and September 30, 1998 (Unaudited)                        5

              Consolidated Statements of Cash Flows for the nine months
              ended September 5 30, 1999 and September 30, 1998 (Unaudited) 6-7

Item 2.       Notes to Consolidated Financial Statements (Unaudited)        8-9

Item 3.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                    10-15

              Quantitative and Qualitative Disclosures About Market Risk    16


PART II  -  OTHER INFORMATION

Item 1.       Legal Proceedings                                             17

Item 2.       Changes in Securities and Use of Proceeds                     17

Item 3.       Defaults upon Senior Securities                               17

Item 4.       Submission of Matters to a Vote of Security Holders           17

Item 5.       Other Information                                             17

Item 6.       Exhibits and Reports on Form 8-K                              17

Signatures                                                                  18


     This Form 10-Q contains forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
changes in interest rate environment, management's business strategy, national,
regional, and local market conditions and legislative and regulatory conditions.
     Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

              PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                     September 30,            December 31,
                  Assets                                 1999                    1998
                  ------                                 ----                    ----
                                                     (Unaudited)
<S>                                                <C>                      <C>
Cash and due from banks                            $    16,555,948             11,844,077
Federal funds sold                                       5,150,000              5,910,000
                                                     -------------          -------------
      Cash and cash equivalents                         21,705,948             17,754,077

Investment securities available for sale                62,225,039             63,227,690
Other investments                                        1,345,100              1,495,300
                                                     -------------          -------------
      Total securities                                  63,570,139             64,722,990

Mortgage loans held for sale                             3,032,303              9,259,817
Loans, net                                             318,581,263            297,488,443
                                                     -------------          -------------
              Net loans                                321,613,566            306,748,260

Premises and equipment, net                              8,673,923              7,806,827
Accrued interest receivable and other assets             6,391,732              5,240,878
                                                     -------------          -------------
              Total assets                         $   421,955,308            402,273,032
                                                     =============          =============

     Liabilities and Shareholders' Equity
     ------------------------------------

Deposits:
     Demand                                        $    50,337,265             48,474,480
     Interest-bearing demand                            29,991,155             31,034,112
     Savings                                            80,353,901             78,686,479
     Time, $100,000 or more                             85,292,485             75,099,131
     Other time                                        120,882,000            116,773,176
                                                     -------------          -------------
         Total deposits                                366,856,806            350,067,378

Demand notes payable to U.S. Treasury                    1,745,382                139,235
FHLB borrowings                                         13,500,000             13,642,857
Accrued interest payable and other liabilities           2,649,416              2,499,427
                                                     -------------          -------------
              Total liabilities                        384,751,604            366,348,897
                                                     -------------          -------------
Shareholders' equity:
     Common stock, no par value; authorized
         3,000,000 shares; issued and outstanding
         2,926,318 shares in 1999 and 2,926,500
         in 1998                                        31,729,462             31,730,372
         Retained earnings                               6,286,629              3,735,171
     Accumulated other comprehensive income               (812,387)               458,592
                                                     -------------          -------------
              Total shareholders' equity                37,203,704             35,924,135
                                                     -------------          -------------

              Total liabilities and shareholders'
                equity                             $   421,955,308            402,273,032
                                                     =============          =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                 3
<PAGE>

              PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY
                  Consolidated Statements of Income (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months         Three Months          Nine Months          Nine Months
                                                         Ended                Ended                Ended                Ended
                                                  September 30, 1999   September 30, 1998   September 30, 1999   September 30, 1998
                                                  ------------------   ------------------   ------------------   ------------------
<S>                                               <C>                  <C>                   <C>                 <C>
Interest Income:
     Interest and fees on loans                   $     7,191,247             6,270,760          20,789,713          17,984,455
     Federal funds sold                                   138,526                80,893             238,599             267,508
     Interest of investment securities:
          U.S. Treasury                                    12,566                22,902              37,561              72,371
          U.S. Government agencies                        550,754               635,033           1,643,777           1,615,118
          States and political subdivisions               242,475               220,500             724,849             657,532
          Other                                            53,482               268,817             160,231             739,693
                                                      -----------           -----------         -----------         -----------

               Total interest income                    8,189,050             7,498,905          23,594,730          21,336,677
                                                      -----------           -----------         -----------         -----------
Interest expense:
     Interest bearing demand deposits                     110,173               134,369             319,073             433,126
     Savings deposits                                     741,832               733,275           2,156,325           1,756,795
     Time deposits                                      2,606,259             2,725,205           7,852,037           7,877,199
     FHLB borrowings                                      185,576               198,392             547,878             687,358
     Other                                                 12,062                11,816              33,511              36,505
                                                      -----------           -----------         -----------         -----------
               Total interest expense                   3,655,902             3,803,057          10,908,824          10,790,983
                                                      -----------           -----------         -----------         -----------

               Net interest income                      4,533,148             3,695,848          12,685,906          10,545,694

Provision for loan losses                                  25,000                80,000              25,000             420,000
                                                      -----------           -----------         -----------         -----------
               Net interest income after
                 provision for loan losses              4,508,148             3,615,848          12,660,906          10,125,694
                                                      -----------           -----------         -----------         -----------
Other income:
     Service charges                                      353,936               302,985             969,993             869,391
     Other service charges and fees                        75,651                65,241             219,807             213,333
     Gain (loss) on sale of securities                         --               129,290             (34,824)            168,448
     Mortgage banking income                              138,162               296,637             668,057             727,575
     Insurance and brokerage commissions                   28,507                40,437             101,254             116,771
     Miscellaneous                                        269,610               212,279             711,689             587,520
                                                      -----------           -----------         -----------         -----------
          Total other income                              865,866             1,046,869           2,635,976           2,683,038
                                                      -----------           -----------         -----------         -----------
Other expense:
     Salaries and employee benefits                     2,095,619             1,754,855           5,658,317           4,436,815
     Occupancy                                            563,251               525,262           1,670,141           1,417,758
     Other                                              1,062,562               877,862           3,047,000           2,617,284
                                                      -----------           -----------         -----------         -----------
          Total other expenses                          3,721,432             3,157,979          10,375,458           8,471,857
                                                      -----------           -----------         -----------         -----------

          Income before income taxes                    1,652,582             1,504,738           4,921,424           4,336,875

Income taxes                                              525,600               513,100           1,574,900           1,443,900
                                                      -----------           -----------         -----------         -----------

          Net income                              $     1,126,982               991,638           3,346,524           2,892,975
                                                      ===========           ===========         ===========         ===========

Net income per share - basic                      $          0.39                  0.34                1.14                0.99
                                                      ===========           ===========         ===========         ===========

Cash dividends declared per share                 $          0.09                  0.09                0.27                0.23
                                                      ===========           ===========         ===========         ===========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

              PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY

           Consolidated Statements of Comprehensive Income (Unaudited)

<TABLE>
<CAPTION>
                                            Three Months          Three Months          Nine Months           Nine Months
                                                Ended                Ended                 Ended                 Ended
                                         September 30, 1999    September 30, 1998    September 30, 1999    September 30, 1998
                                         ------------------    ------------------    ------------------    ------------------
<S>                                      <C>                   <C>                   <C>                   <C>
Net earnings                             $        1,126,982    $          991,638    $        3,346,524    $        2,892,975
                                         ------------------    ------------------    ------------------    ------------------
Other comprehensive income, net of tax:
 Unrealized gains (losses)
  on investment securities
  available for sale:
   Unrealized gains
   (losses) arising during
   the period, net of
   taxes of $(249,024),
   $151,481, $(824,450)
   and $70,250,
     respectively                                  (390,319)              237,430            (1,292,238)              110,110

 Less reclassification
  adjustment for (gains)
  losses included in net
  earnings, net of taxes of
  $0, $(50,358), $13,564
  and $(65,610),
   respectively                                          --               (78,932)               21,260              (102,837)
                                         ------------------    ------------------    ------------------    ------------------

Other comprehensive income                         (390,319)              158,499            (1,270,978)                7.272
                                         ------------------    ------------------    ------------------    ------------------

Comprehensive income                     $          736,663    $        1,150,137    $        2,075,546    $        2,900,248
                                         ==================    ==================    ==================    ==================
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                 5
<PAGE>

              PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY

                Consolidated Statements of Cash Flows (Unaudited)

                  Nine months ended September 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                       1999                     1998
                                                                                       ----                     ----
<S>                                                                                <C>                       <C>
Cash flows from operating activities:
   Net earnings                                                                    $  3,346,524               2,892,975
   Adjustments to reconcile net earnings to
     net cash provided (used) by operating activities:
       Depreciation, amortization and accretion                                         765,900               1,103,489
       Provision for loan losses                                                         25,000                 420,000
       Loss (gain) on sale of investment securities                                      34,824                (168,448)
       Loss (gain) on sale of mortgage loans                                            287,139                  (7,995)
       Gain on sale of other real estate                                                 36,149                      --
             Change in:
             Other assets                                                              (133,785)               (504,384)
             Other liabilities                                                          149,990                 297,592
             Mortgage loans held for sale                                             5,940,374               1,567,256
                                                                                   ------------            ------------

              Net cash provided (used) by operating activities                       10,452,115               5,600,485
                                                                                   ------------            ------------
Cash flows from investing activities:
   Purchases of investment securities available-for-sale                            (19,521,841)            (42,856,594)
   Proceeds from calls and maturities of investment securities
        available for sale                                                           11,101,803              20,593,040
   Proceeds from sales of investment securities available for sale                    7,125,196               9,336,633
   Change in other investments                                                          150,200               1,524,300
   Net change in loans                                                              (21,322,539)            (49,019,626)
   Purchase of premises and equipment                                                (1,748,854)             (1,206,055)
   Improvements to other real estate                                                   (239,944)                     --
   Proceeds from sale of other real estate                                              498,994                      --
                                                                                   ------------            ------------
           Net cash used in investing activities                                    (23,956,985)            (61,628,302)
                                                                                   ------------            ------------
Cash flows from financing activities:
   Net change in deposits                                                            16,789,428              57,792,461
   Change in demand notes payable to U.S. Treasury                                    1,606,147              (1,402,467)
   Net change in FHLB borrowings                                                       (142,857)             (8,142,857)
   Common stock issued, net of costs                                                         --               7,787,467
   Cash dividends                                                                      (790,106)               (672,479)
   Cash paid in lieu of fractional shares                                                (5,871)                     --
                                                                                   ------------            ------------

         Net cash provided by financing activities                                   17,456,741              55,362,125
                                                                                   ------------            ------------

Net change in cash and cash equivalents                                               3,951,871                (665,692)

Cash and cash equivalents at beginning of year                                       17,754,077              20,731,954
                                                                                   ------------            ------------

Cash and cash equivalents at end of year                                             21,705,948              20,066,262
                                                                                   ============            ============

</TABLE>

                                       6
<PAGE>

             PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY

                Consolidated Statements of Cash Flows (Unaudited)

                  Nine months ended September 30, 1999 and 1998

                                   (Continued)


<TABLE>
<S>                                                          <C>                 <C>

Supplemental disclosures of cash flow information:
   Cash paid during the year for:
       Interest                                               $ 10,563,070        10,800,032
       Income taxes                                           $    700,000           684,169
                                                              ============      ============

Noncash investing and financing activities:
       Change in net unrealized gain (loss) on investment
           securities available for sale, net of tax          $ (1,270,978)            7,272
       Transfer of loans to other real estate                 $    204,719           314,782
                                                              ------------      ------------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       7
<PAGE>

             PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements (Unaudited)


(1)  Summary of Significant Accounting Policies
     ------------------------------------------

     The consolidated financial statements include the financial statements of
     Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary,
     Peoples Bank. All significant intercompany balances and transactions have
     been eliminated in consolidation.

     A description of the Company's significant accounting policies can be found
     in Note 1 of the Notes to Consolidated Financial Statements in the Bank's
     1998 Annual Report to Shareholders. The consolidated financial statements
     in this report are unaudited. In the opinion of management, all adjustments
     (none of which were other than normal accruals) necessary for a fair
     presentation of the financial position and results of operations for the
     periods presented have been included.

     Management of the Company has made a number of estimates and assumptions
     relating to reporting of assets and liabilities and the disclosure of
     contingent assets and liabilities to prepare these consolidated financial
     statements in conformity with generally accepted accounting principles.
     Actual results could differ from those estimates.

(2)  Allowance for Loan Losses
     -------------------------

     The following is an analysis of the allowance for loan losses for the nine
     months ended September 30, 1999 and 1998:

                                          1999             1998
                                          ----             ----

     Balance, beginning of period     $ 4,136,690        4,374,641
     Provision for loan losses             25,000          420,000
     Less:
         Charge-offs                     (180,556)        (109,779)
         Recoveries                        58,026           25,335
                                      -----------      -----------
             Net charge-offs             (122,530)         (84,444)
                                      -----------      -----------

     Balance, end of period           $ 4,039,160        4,710,197
                                      ===========      ===========

(3)  Recent Accounting Pronouncements
     --------------------------------

     In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
     "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
     133 establishes accounting and reporting standards for hedging derivatives
     and for derivative instruments including derivative instruments embedded in
     other contracts. It requires the fair value recognition of derivatives as
     assets or liabilities in the financial statements. The accounting for
     changes in the fair value of a derivative depends on the intended use of
     the derivative instruments at inception. Fair value changes on instruments
     used as air value hedges are recorded in the earnings of the period
     simultaneous with accounting for the fair value change of the item being
     hedged. Fair value changes on cash flow hedges are recorded in
     comprehensive income rather than earnings. Fair value changes on derivative
     instruments that are not intended as a hedge are recorded in the earnings
     of the period of the change. SFAS No. 133 is effective for all fiscal
     quarters of all fiscal years beginning after June 15, 1999, but initial
     application of the Statement must be made at the beginning of the quarter.
     At the date of initial application, an entity may transfer any held to
     maturity security into the available for sale or trading categories without
     calling into question the entity's intent to hold other securities to
     maturity in the future. The Company believes the adoption of SFAS No. 133
     will not have a material impact on its financial position, results of
     operations or liquidity.

                                       8
<PAGE>

(4)  Corporate Reorganization

     Effective August 31, 1999, Peoples Bank completed the process of converting
     to the holding company form of organization. Peoples Bank in now a
     subsidiary of Peoples Bancorp of North Carolina, Inc. ("Peoples Bancorp"),
     a one-bank holding company, headquartered in Newton, North Carolina.

     As a result of the reorganization, each share of Peoples Bank common stock
     was automatically converted into one share of Peoples Bancorp stock.
     Peoples Bancorp is now the sole shareholder of Peoples Bank. The corporate
     reorganization was accounted for in a manner similar to a pooling of
     interest.

     Peoples Bancorp's Board of Directors is composed of the same persons who
     are directors of Peoples Bank. Robert C. Abernethy, Chairman of the Board
     of the Bank, is also Chairman of Peoples Bancorp's Board of Directors.
     Peoples Bank's President and Chief Executive Officer, Tony W. Wolfe, is
     also President and Chief Executive Officer of Peoples Bancorp. Joseph F.
     Beaman, Jr., who serves as Executive Vice President and Corporate Secretary
     of the Bank will also serve as Executive Vice President, Corporate
     Secretary and Treasurer of Peoples Bancorp.

                                       9
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Results of Operations

     Summary. Net income for the third quarter of 1999 was $1.1million, an
increase of $135,000 or 14% over the $992,000 earned in the same period in 1998.
Basic income per share for the quarter ended September 30, 1999 increased to
$0.39 or 15% from $0.34 in the comparable period of 1998. Contributing
significantly to these favorable results has been the active manner in which the
Company's net interest margin has been managed. Annualized return on average
assets was 1.07% for the third quarter 1999 compared to 1.04% for the same
period in 1998, and annualized return on average shareholders' equity was 12.71%
versus 11.99%, respectively.

     Net income for the nine months ended September 30, 1999 was $3.3 million,
an increase of 16% over the $2.9 million earned in the first nine months of
1998. Basic net income per share for this period increased 15% to $1.14 from
$0.99 for the nine months ended September 30, 1998. The strong growth in net
income resulted from a 20% increase in net interest income and a reduction in
provision for loan losses of $395,000. Annualized return on average assets was
1.08% for the first nine months of 1999 compared to 1.07% for the same period in
1998, and annualized return on average shareholders' equity was 11.59% versus
12.35%, respectively.

     Net Interest Income. Net interest income, the major component of the
Company's net income, was $4.5 million for the three months ended September 30,
1999 an increase of 23% over the $3.7 million earned in the same period in 1998.
The increase over 1998 third quarter net interest income was attributable to an
increase in the volume of average earning assets and a decrease in the average
rate on interest bearing liabilities, partially offset by a decline in the yield
on earning assets.

     Interest income increased $690,000 or 9% for the three months ended
September 30, 1999 compared with the same period in 1998. The increase was due
to an increase in the volume of earning assets, which resulted from an increase
in loan volume.

     Interest expense decreased $147,000 or 4% for the three months ended
September 30, 1999 compared with the same period in 1998. The decrease in
interest expense was due to a decrease in the cost of funds from 5.08% to 4.44%
which more than offset the increase in volume of interest bearing liabilities.

     In the nine month periods ended September 30, 1999 and September 30, 1998,
net interest income increased 20% to $12.7 million from $10.5 million,
respectively. This increase was attributed to the increase in the volume of
average earning assets to $391.7 million for the nine months ended September 30,
1999 from $343.2 million for the same period in 1998, combined with an increase
in the annualized tax equivalent net yield on earning assets to 4.46% for the
nine months ended September 30, 1999 from 4.22% for the nine months ended
September 30, 1998.

     Interest income increased $2.3 million or 11% for the nine months ended
September 30, 1999 compared to the same period in 1998. The increase was due to
an increase in the volume of average earning assets. Average loans increased 23%
to $322.1 million, while average investment securities available for sale
increased 2% to $59.5 million in the nine months ended September 30, 1999
compared to the same period in 1998. All other interest-earning assets including
federal funds sold decreased to an average of $10.1 million in the nine months
ended September 30, 1999 from $23.9 million in the same period in 1998. The
increase in volume of average earning assets was partially offset by a decrease
in the yield on average earning assets to 8.18% for the nine months ended
September 30, 1999 compared to 8.40% in the same period in 1998.

                                      10
<PAGE>

     Interest expense increased 1% to $10.9 million for the nine months ended
September 30, 1999 compared to $10.8 million for the nine months ended September
30, 1998. The increase was due to an increase in the volume of interest bearing
liabilities partially offset by a decrease in the average rate paid on interest
bearing liabilities to 4.53% for the nine months ended September 30, 1999 from
4.98% for the nine months ended September 30, 1998. Average interest bearing
liabilities increased 12% to $322.2 million for the nine months ended September
30, 1999 from $288.3 million for the nine months ended September 30, 1998. This
increase is attributable to the increase in average interest bearing deposits to
$307.8 million in the nine months ended September 30, 1999 from $271.6 million
for the comparable period in 1998.

     Non-Interest Income. Total non-interest income was $866,000 in the third
quarter of 1999, a decrease of 17% from the $1.0 million earned in the third
quarter of 1998. Service charges on deposit accounts, which represent the
largest single category of non-interest income, increased 17% to $354,000 for
the third quarter of 1999 due to the growth in the deposit base coupled with an
increase in service charges on deposits, which was implemented August 1, 1999.
Mortgage banking income decreased 53% to $138,000 in the third quarter of 1999
compared to $297,000 for the third quarter of 1998. The decrease in mortgage
banking income was due to an increase on mortgage loan rates during third
quarter 1999 which resulted in a decrease in mortgage loan applications as well
as a loss on mortgage loans sold in the secondary market. The Company had no
securities gains or losses for the three months ended September 30, 1999
compared to a net gain on sale of securities of $129,000 for the three months
ended September 30, 1998.

     Total non-interest income was $2.6 million for the nine months ended
September 30, 1999, a decrease of 2% from the $2.7 million earned in the same
period of 1998. Service charges on deposit accounts increased 12% to $970,000
for the nine months ended September 30, 1999 due primarily to the growth in the
deposit base and partially attributable to an increase in service charges on
deposits implemented August 1, 1999. Mortgage banking income decreased 8% to
$668,000 for the nine months ended September 30, 1999 from $728,000 for the nine
months ended September 30, 1998. The decrease in mortgage banking income was due
to an increase on mortgage loan rates during third quarter 1999 which resulted
in a decrease in mortgage loan applications as well as a loss on mortgage loans
sold in the secondary market. The Company reported securities losses of $35,000
for the nine months ended September 30, 1999 compared to securities gains of
$168,000 for the nine months ended September 30, 1998. Miscellaneous
non-interest income increased 21% to $712,000 for the nine months ended
September 30, 1999 from $588,000 for the nine months ended September 30, 1998
primarily due to activity associated with the formation of the Bank's appraisal
subsidiary.

     Non-Interest Expense. Total non-interest expense was $3.7 million in the
third quarter of 1999, an increase of 18% over the same period in 1998. The
majority of this increase resulted from an increase of $341,000 or 19% in salary
and employee benefits for the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998. This increase reflects regular
merit and promotional increases and an increase in the number of employees to
service growth in the customer base. Other non-interest expense increased
$185,000 or 21% to $1.1 million for the three months ended September 30, 1999
from $878,000 for the three months ended September 30, 1998. Occupancy expense
increased 7% due to additional leased space and depreciation for equipment
purchased.

     Total non-interest expense was $10.4 million in the nine months ended
September 30, 1999, an increase of 22% over the same period in 1998. The
majority of this increase was a result of 28% increase in salary and employee
benefits reflecting regular merit and promotional increases and an increase in
the number of employees to service growth in the customer base. Occupancy
expense increased 18% due to additional leased space and depreciation for
equipment purchased. Other expenses increased 16% or $430,000 as a result of the
added expense of serving a larger customer base and expenses associated with
bank holding company formation and Year 2000 preparedness measures.

                                      11
<PAGE>

     Income Taxes. The Company reported income taxes of $526,000 and $513,000
for the third quarter ended September 30, 1999 and 1998, respectively. This
represented effective tax rates of 32% and 34% for the respective periods. The
increase in reported income taxes during the third quarter of 1999 was due to
the increased level of taxable income, coupled with a decrease in the North
Carolina State income tax rate for 1999.

     The Company reported income taxes of $1.6 million and $1.4 million for the
nine-month periods ending September 30, 1999 and 1998, respectively. This
represented effective tax rates of 32% and 33% for the respective periods. The
increase in reported income taxes during 1999 was due to the increased level of
taxable income, coupled with a decrease in the North Carolina State income tax
rate for 1999.


Analysis of Financial Condition

     Investment Securities. Available-for-sale securities amounted to $62.2
million at September 30, 1999 compared to $63.2 million at December 31, 1998.
Average investment securities for the nine months ended September 30, 1999
amounted to $59.5 million compared to $59.8 million for the year ended December
31, 1998.

     Loans. At September 30, 1999, loans were $322.6 million compared to $301.6
million at December 31, 1998, an increase of 7%. This loan growth reflects a
continuation of strong economic growth in the Catawba Valley region. Average
loans represented 82% of total earning assets for the nine months ended
September 30, 1999, compared to 77% for the year ended December 31, 1998.
Mortgage loans held for sale were $3.0 million at September 30, 1999, a decrease
of 67% from the December 31, 1998 balance of $9.3 million. The reduction in
mortgage loans held for sale resulted from an increase in forward contracts in
order to protect the Company from an increase in mortgage loan rates.

     Asset Quality. Non-performing assets totaled $4.5 million at September 30,
1999 or 1.07% of total assets, compared to $4.2 million or 1.04% of total assets
at December 31, 1998. Non-accrual loans were $4.2 million at September 30, 1999,
an increase of $925,000 over non-accruals of $3.3 million at December 31, 1998.
As a percentage of total loans outstanding, non-accrual loans were 1.31% at
September 30, 1999 compared to 1.09% at December 31, 1998. Loans ninety days
past due and still accruing amounted to $29,000 and $307,000 at September 30,
1999 and December 31, 1998, respectively. The allowance for loan losses at
September 30, 1999 amounted to $4.0 million or 1.25% of total loans compared to
$4.1 million or 1.37% of total loans at December 31, 1998.

     The reduction in the allowance for loans losses and the provision for loan
losses reflect changes in underwriting policies and management's belief that the
allowance for loan losses adequately covers anticipated losses.

     Deposits. Total deposits at September 30, 1999 were $366.9 million, an
increase of 5% over deposits of $350.1 million at December 31, 1998.
Certificates of deposit in amounts greater than $100,000 or more totaled $85.3
million at September 30, 1999, compared to $75.1 million at December 31, 1998.
Most of these deposits are from long standing customers who reside or own
businesses in the Company's primary service area, and therefore, are believed by
the Company to be stable, and for all practicable purposes, no more rate
sensitive than core deposits.

     Borrowed Funds. Federal Home Loan Bank borrowings were $13.5 million at
September 30, 1999 compared to $13.6 million at December 31, 1998. The average
balance of Federal Home Loan Bank borrowings for the nine months ended September
30, 1999 was $13.5 million compared to $15.3 million for the year ended December
31, 1998. At September 30, 1999, Federal Home Loan Bank borrowings with
maturities exceeding one year amounted to $3.4 million.

                                      12
<PAGE>

     Capital Structure. Shareholders' equity at September 30, 1999 was $37.2
million compared to $35.9 million at December 31, 1998. In addition, at
September 30, 1999 and December 31, 1998, unrealized gains and losses in the
available-for-sale securities portfolio amounted to a loss of $812,000 and a
gain of $459,000, respectively. Annualized return on average equity as of
September 30, 1999 was 11.59% compared to 12.04% for the year ended December 31,
1998. Total dividends paid for the nine months ended September 30, 1999 amounted
to $790,000.

     Under the regulatory capital guidelines of the Federal Deposit Insurance
Corporation (FDIC), financial institutions are currently required to maintain a
total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based
capital ratio of 4.0% or greater. Tier 1 capital is generally defined as
shareholders' equity less all intangible assets and goodwill. The Company's Tier
I capital ratio was 11.23% and 11.04% at September 30, 1999 and December 31,
1998, 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 12.44% and 12.29% at
September 30, 1999 and December 31, 1998, respectively. In addition to the Tier
I and total risk-based capital requirements, financial institutions are also
required by the FDIC to maintain a leverage ratio of Tier 1 capital to total
average assets of 4.0% or greater. The Company's Tier I leverage capital ratio
was 8.92% and 9.41% at September 30, 1999 and December 31, 1998, respectively.

     A bank is considered to be "well capitalized" if it has a total risk-based
capital ratio of 10.0 % or greater, a Tier I risk-based capital ratio of 6.0% or
greater, and has a leverage ratio of 5.0% or greater. Based upon these
guidelines, the Bank was considered to be "well capitalized" at September 30,
1999 and December 31, 1998.

     Liquidity. The Company'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 Company responds to these needs is affected by the Company'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 Company, and the ability to borrow funds from other sources. The Company's
primary sources of liquidity are cash and cash equivalents, available-for-sale
securities, deposit growth, and the cash flows from principal and interest
payments on loans and other earning assets. In addition, the Bank is able, on a
short-term basis, to borrow funds from the Federal Reserve System, the Federal
Home Loan Bank of Atlanta (FHLB) and The Bankers Bank, and is also able to
purchase federal funds from other financial institutions. At September 30, 1999
the Bank had a $30 million line of credit with FHLB, with an outstanding balance
of $13.5 million. The Company also has the ability to borrow up to $10 million
through The Bankers Bank. At September 30, 1999 the Company had no outstanding
borrowings with the Bankers Bank. The liquidity ratio for the Company, which is
defined as net cash, interest bearing deposits with banks, Federal Funds sold,
certain investment securities and certain FHLB advances, as a percentage of net
deposits and short-term liabilities was 22.57% at September 30, 1999 and 26.49%
at December 31, 1998. The decrease in the Company's liquidity ratio reflects
strong loan demand prevalent in the Company's area.

     Company Reorganization. Effective August 31, 1999, Peoples Bank completed
the process of converting to the holding company form of organization. Peoples
Bank in now a subsidiary of Peoples Bancorp of North Carolina, Inc. ("Peoples
Bancorp"), a one-bank holding company, headquartered in Newton, North Carolina.

     As a result of the reorganization, each share of Peoples Bank common stock
was automatically converted into one share of Peoples Bancorp stock. Peoples
Bancorp is now the sole shareholder of Peoples Bank. The corporate
reorganization was accounted for in a manner similar to a pooling of interest.

                                      13
<PAGE>

     Peoples Bancorp's Board of Directors is composed of the same persons who
are directors of Peoples Bank. Robert C. Abernethy, Chairman of the Board of the
Bank, is also Chairman of Peoples Bancorp's Board of Directors. Peoples Bank's
President and Chief Executive Officer, Tony W. Wolfe, is also President and
Chief Executive Officer of Peoples Bancorp. Joseph F. Beaman, Jr., who serves as
Executive Vice President and Corporate Secretary of the Bank will also serve as
Executive Vice President, Corporate Secretary and Treasurer of Peoples Bancorp.

     Year 2000. The Company formed a Year 2000 Task Force in 1997 comprised of
members representing all banking departments to address the many areas affected
by the Year 2000 computer issue. Overall responsibility of the Year 2000 Task
Force has been assigned to the Senior Vice President - Information Services, an
executive officer of the Bank. The "Year 2000 issue" is a general term
pertaining to computer programs and systems that were originally created using
only two digits to identify the calendar year, without planning ahead for the
upcoming change in the century. The Board of Directors approved a detailed Year
2000 project plan, which included contacting all of the software vendors that
maintain the computer programs relied upon by the Company, obtaining assurances
from these software vendors that their products would be Year 2000 compliant,
evaluating and testing all systems potentially affected, contacting large
commercial loan customers to determine their Year 2000 readiness, and developing
contingency plans for all mission critical systems. The Company is currently
meeting all dates as established in the Year 2000 project plan.

     The Company has identified all hardware and software that need
date-sensitive testing to confirm Year 2000 readiness. Vendors and suppliers
have been contacted for information concerning their products and their
company's readiness for the Year 2000. The Company has also sent letters to and
received responses from vendors used by the Company for purchases of office and
computer supplies. The Company has conducted Year 2000 awareness meetings with
large commercial loan customers and the Company's own employees. A letter and
questionnaire has been sent to commercial customers with large relationships
addressing the Year 2000 issue and their compliance plans. Their responses have
been evaluated and commercial credits are being reviewed by the Credit
Administration department for Year 2000 issues. In addition, all commercial
loans of $250,000 or more include clauses in the standard commitment letter
addressing the Year 2000 issue and the customer's readiness to address this
problem.

     The Company is utilizing both internal and external resources for testing
of all hardware and software. The Company's core software system and the
mainframe AS400 are currently operating on vendor-supplied Year 2000 compliant
software versions. In addition to Year 2000 compliant software releases, the
Company conducted extensive independent verification and validation processes on
all of the Company's systems and software to confirm that they are Year 2000
compliant. Year 2000 testing has been completed on all systems. To further
evaluate the Company's overall readiness, re-testing of computer systems began
at the end of September 1999.

     Since many of the programs used by the Company are "off-the-shelf" as
compared to "highly customized," the cost to address these matters is not
expected to have a material impact on the future operating results or financial
condition of the Company. A total of $243,000 has been budgeted to address Year
2000 issues. Of this amount, approximately $183,000 in costs has been incurred
as of September 30, 1999. This additional cost has not been a factor in delaying
any other planned information services projects. All expenses associated with
Year 2000 corrections will be expensed in the year incurred and will be funded
through normal operating cash flow.

     The costs and completion dates for testing and correction of Year 2000
problems are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific factors that might
cause such material differences include, but are not limited to, the

                                      14
<PAGE>

availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer programs, the inability to control third party
modifications and similar uncertainties.

                                      15
<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

        There have been no material changes in the quantitative and qualitative
disclosures about market risks as of September 30, 1999 from that presented in
the Bank's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.

                                      16
<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

          In the opinion of management, the Company is not involved in any
          pending legal proceedings other than routine, non-material proceedings
          occurring in the ordinary course of business.


Item 2.   Changes in Securities and Use of Proceeds

          Not applicable.


Item 3.   Defaults Upon Senior Securities

          Not applicable


Item 4.   Submission of Matters to a Vote of Security Holders

          Not applicable


Item 5.   Other Information

          Not applicable


Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits

               Exhibit 27 - Financial Data Schedules

          (b)  Reports on Form 8-K

               During the quarter ended September 30, 1999 the Company filed two
               reports on Form 8-K dated August 9, 1999 and August 31, 1999.

               The Company filed a Form 8-K on August 9, 1999, announcing the
               retirement of Senior Vice President, James R. (Rudy) Roberts,
               from his position effective August 9, 1999.

               The Company filed a Form 8-K on August 31, 1999, announcing the
               completion of its reorganization into the holding company form of
               organization.

                                      17
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                      Peoples Bancorp of North Carolina, Inc.




 November 10, 1999                    By:    /s/ Tony W. Wolfe
- ------------------                           ----------------------------
       Date                                  Tony W. Wolfe
                                             President and CEO



 November 10, 1999                    By:    /s/ Joseph F. Beaman, Jr.
- ------------------                           ----------------------------
       Date                                  Joseph F. Beaman, Jr.
                                             Executive Vice President
                                             (Principal Financial and Principal
                                             Accounting Officer)

                                      18

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 9

<S>                             <C>                     <C>
<PERIOD-TYPE>                   9-MOS                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999             DEC-31-1998
<PERIOD-START>                             JAN-01-1999             JAN-01-1998
<PERIOD-END>                               SEP-30-1999             DEC-31-1998
<CASH>                                      16,555,948              11,844,077
<INT-BEARING-DEPOSITS>                      29,991,155              31,034,112
<FED-FUNDS-SOLD>                             5,150,000               5,910,000
<TRADING-ASSETS>                                     0                       0
<INVESTMENTS-HELD-FOR-SALE>                 62,225,039              63,227,690
<INVESTMENTS-CARRYING>                               0                       0
<INVESTMENTS-MARKET>                                 0                       0
<LOANS>                                    322,620,423             301,625,133
<ALLOWANCE>                                (4,039,160)             (4,136,690)
<TOTAL-ASSETS>                             421,955,308             402,273,032
<DEPOSITS>                                 366,856,806             350,067,378
<SHORT-TERM>                                10,170,355                  12,500
<LIABILITIES-OTHER>                          2,649,416               2,499,426
<LONG-TERM>                                  3,364,942              13,642,857
                                0                       0
                                          0                       0
<COMMON>                                    31,729,462              14,632,500
<OTHER-SE>                                   5,474,242              21,291,635
<TOTAL-LIABILITIES-AND-EQUITY>             421,955,308             402,273,032
<INTEREST-LOAN>                             20,789,713              24,885,434
<INTEREST-INVEST>                            2,566,418               4,006,522
<INTEREST-OTHER>                               238,599                 323,149
<INTEREST-TOTAL>                            23,594,730              29,215,105
<INTEREST-DEPOSIT>                          10,327,435              13,616,433
<INTEREST-EXPENSE>                          10,908,824              14,539,968
<INTEREST-INCOME-NET>                       12,685,906              14,675,137
<LOAN-LOSSES>                                   25,000                 445,000
<SECURITIES-GAINS>                            (34,824)                 168,448
<EXPENSE-OTHER>                              3,047,000               3,710,861
<INCOME-PRETAX>                              4,921,424               5,855,681
<INCOME-PRE-EXTRAORDINARY>                           0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                 3,346,524               4,009,198
<EPS-BASIC>                                       1.14                    1.44
<EPS-DILUTED>                                        0                       0
<YIELD-ACTUAL>                                    4.46                    4.30
<LOANS-NON>                                  4,217,542               3,292,310
<LOANS-PAST>                                    28,505                 307,270
<LOANS-TROUBLED>                                     0                       0
<LOANS-PROBLEM>                                      0                       0
<ALLOWANCE-OPEN>                             4,136,690               4,374,641
<CHARGE-OFFS>                                (180,556)               (746,280)
<RECOVERIES>                                    58,026                  63,329
<ALLOWANCE-CLOSE>                            4,039,160               4,136,690
<ALLOWANCE-DOMESTIC>                                 0                       0
<ALLOWANCE-FOREIGN>                                  0                       0
<ALLOWANCE-UNALLOCATED>                              0                       0


</TABLE>


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